How digital workflows can help with MTD
Making Tax Digital (MTD) came as a shock for many accountancy firms. Now that VAT clients are up and running, Valme Claro investigates how some practices have used the government’s initiative as a springboard to improve internal processes in other areas.
“You should have practice management tools in place regardless of MTD, but it was a catalyst,” said CooperFaure’s director Freddie Faure.
“As a growing business we made the decision to invest more in practice management tools because it was our future. There was no way we could have survived the growth without them.”
Partly thanks to MTD, digital workflows emerged as one of the fastest growing trends among entrants to this year’s Accounting Excellence Awards. In 2019, 16% of entrants mentioned implementing digital workflows - up from 5% the previous year. MTD forced firms to find suitable software to file VAT returns, but also required them to track which clients were above the MTD threshold, who was due to file when and which clients were deferred.
Similar client segmentation and tracking will become even more important - and complicated - when the next phase of MTD moves on from VAT to income and corporation tax.
“MTD has put pressure on our processes,” said Jolene Hutton, operations director of Eazitax. “At the same time we have to run the normal practice for the normal tax return season we have to look at how we're going to process tax data when it goes from yearly to quarterly. We have to think about running two different processes instead of one.”
The government’s initiative has prompted firms to think about their digital workflows and to look for software solutions that will help them manage clients through the MTD transition.
Jonathan Gaunt, founder of FD Works in Bristol commetented: “MTD has made a massive impact around the quality of data from HMRC’s perspective.” From the practice point of view, accountants are desperate to see who’s filed their VAT returns and whether they’ve paid HMRC, he added.
HMRC has that data, but doesn’t currently display it in the agent services account - leaving that gap to be filled by commercial tax and practice management programs that can pull that data in from HMRC’s application programming interfaces. “Then you can see if there are any problems. It’s a starting point to have that conversation with clients,” said Gaunt.
But MTD is just one set of hurdles in the practitioner’s path - having identified the need to beef up their internal processes to handle digital VAT returns, they’ve got an opportunity to extend automation into other areas of their practice, including self assessment processes, payroll, management accounting. If they tackle it in the right way, these improvements can make a big difference to efficiency and profitability.
Fees, billing and cashflow
As well as posing a logistical challenge to bring clients into the new regime, MTD put a strain on practice profitability and cashflows. Firms invested a lot of time and effort preparing for MTD, but many haven’t succeeded in charging clients for the extra work.
“The cost of all this software that practices need for MTD is quite steep. But for a lot of those costs you are not able to charge more because the clients think it's just your job, and regardless of whether the law changes they don't want to see the service change,” Faure said.
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“It's hard to pass the cost of the tools you need to do your job with onto clients. Clients don't understand why you want to charge them more.”
All this digital tax automation is one of the factors driving the commoditisation of compliance services, which many AccountingWEB practitioners have started to experience with clients resisting fee increases and looking for cheaper accountants.
Technology has played a role in standardising traditional compliance services, but it can also help accountants get a better handle on the work they are doing. And being able to track the amount of time spent on different tasks gives them the ability to calculate the cost to the firm and the ultimate profitability of their work.
This is where more comprehensive practice management tools come into play, according to Thomson Reuters Onvio product manager Ian Cooper. Integrated time and billing modules can highlight when the effort expended on a task exceeds the fees collected.
Because Onvio can track activity in the suite’s submodules, he explained, “The firm would be able to make a sanity check on the profitability of a quarterly submission even if the staff haven't taken any time to record,” he said.
Summary reports on work in progress can also play an important part in smoothing out cashflow problems: “If an accountant sees a large amount of WIP in the ending period balance, they'd be able to quickly pinpoint billing opportunities for services that are charged on an hourly rate, this smooths the cashflow for the firm.
“They'd be able to see where the WIP is held and whether they can complete that project more quickly so they can get the bill done. Or they could build a work in progress bill to charge for the work completed so far.”
Ultimately practice automation helps practitioners to do more compliance work efficiently, they can maintain their margins even if the chargeable value of the work is falling and importantly they can free up time to focus on higher value work.
Increasingly some of the tools that have emerged in response to recent challenges such as GDPR and MTD have enabled accountants to boost productivity in other areas - for example the document sharing portals that firms now use to share documents, turn around electronic approvals and collaborate more actively with their clients.
One of the characteristics of web-based business models is the way they often get customers to get more directly involved in the administrative process - so Uber users become their own cab dispatcher, or Expedia users book their hotel rooms and flights themselves rather than using a travel agent.
Practice portals are starting to play a similar role here by getting clients to play a more active role in the workflow leading up to compliance deadlines. Automating information requests and giving clients tools to review and authorise their returns can train them to provide the information earlier in the tax return cycle and ultimately shorten turnaround times.
Eazitax works with a large number of very small businesses, who can often be slow to respond to requests for information. “We are very much a practice that chases its clients, so we are making sure we are keeping them informed so that they know we are going to need that quarterly information,” said Hutton.
Cooper Faure used to use Dropbox as its portal, but upgraded its systems in the wake of GDPR to tighten up its document sharing, clearance and billing processes. “Saving the documents, then bringing them to the accounting software was very time consuming, so now we are using a lot more integrated products that can create rules that will directly, without a lot of human intervention, send an invoice straight into our accountancy package without us having to key in the data,” explained Faure.
If MTD came a jolt to internal practice systems during 2019, some of the lessons learned and potential efficiency gains will come into play when firms start to gear up for the 2018-19 tax return workload. One of the recurring characteristics of finalists in AccountingWEB’s Accounting Excellence Awards is that they don’t view practice management systems solely as a means to cope with the next big compliance hurdle. For them, it’s more about building a platform for continuous improvement.
At Eazitax, Hutton is already looking beyond self assessment season to the next phase of MTD. When personal tax reporting goes quarterly, all that client interaction “will have to go out on a bigger scale,” she said. “We will need a system to chase clients automatically.”