Xero’s Turner takes on tax challenge
In recent months, Xero has taken a more public stance on taxation issues. John Stokdyk explores how and why the developer is deepening its tax expertise.
Since the 2018 launch of Xero Tax, the New Zealand-founded cloud accounting software developer has been drawn into increasingly technical tributaries of UK tax.
The first version of Xero Tax handled accounts production and corporation tax. Last week, beta test site Pink Pig Financials reported filing the first Xero Tax self assessment return on 28 January. After a long wait, it seems like Xero’s personal tax module is getting ready to make its public debut.
Breaking new ground
Like QuickBooks, Xero is taking on a much more complex logical challenge as it expands its cloud accounting application into tax compliance. Over the past year, Xero has responded by taking more public stances on major tax issues.
A few months after Covid-19 threw everything out of kilter, Xero launched a roadmap for business recovery that put forward a number of tax-related proposals, including:
- A recommendation to simplify the tax regime for small businesses
- Calling for a six-month NIC holiday for small businesses
- An increase in the VAT registration threshold
- Increased R&D tax credits and redefining it to include digital tools such as ecommerce and cloud technology.
These are entirely sensible suggestions of the sort we hear all the time from business lobbies and professional bodies. But by entering this arena, Xero has also taken on the gladiatorial challenge of staying current with a dynamic set of ever-changing rules and having to argue its corner against opposing forces.
We all want to simplify the tax system, but how exactly would Xero go about it? And what conditions would it specify and tolerate around the NIC holiday, VAT threshold increase or R&D tax credit review?
AccountingWEB tax editor Rebecca Cave pointed out that there is always a trade-off between simple and fair: the more simple the law is, the less fair it is likely to be as outlying cases will fall the wrong side of the line – as we have seen with the loan charge, for example.
Having raised his company’s profile on tax matters, AccountingWEB approached Xero UK managing director Gary Turner during the autumn to test him on the big tax issues facing UK accountants.
Xero has first-hand experience developing code for and working with the tax regimes in Australia and New Zealand. Perhaps those insights might feed into the company’s analysis of the UK situation?
“We’ve been pretty successful in Australia and New Zealand on personal tax. Some things may be easier there, but we are going in [to the UK tax market] with our eyes open and with some ambition,” Turner said.
“Everybody thinks their tax system is the most complicated in the world, but our purpose and focus is to streamline the operational efficiencies and productivity among small business. We’ve got product portfolios designed to serve our customers. It would be easy to stick to VAT and payroll, but we can’t opt-out of bits of compliance because they’re more complicated.
“We come at it from another perspective. We can’t just be building compliance tools and tax tools. There has to be a more compelling story to tie them together. We think there’s scope for doing this in the cloud in ways that haven’t been there in prior technology generations. Open Banking and the freeing up of data is still more of a vision than a reality, but interconnectivity between banks, HMRC and other stakeholders will mean data should be easier to come by and collate.”
Evolution of digital tax
Since publishing the business manifesto, Turner also showed up at the ICAEW’s annual Wyman Tax Symposium, where he offered public support for Paul Aplin’s call to use MTD to harness digital technology for the benefit of taxpayers, agents and HMRC.
According to Turner, Covid-19 compressed a decade's worth of change into less than a year and brought digitisation to the fore. Having embraced cloud systems to cope with MTD, many businesses used those tools to get better insights into their business, collect payments more efficiently and gain access to capital that saw them through the trials of 2020.
Returning to the simplification issue, AccountingWEB asked Turner to consider whether MTD would add to the burdens on small businesses and their accountants if it proceeded without taking any steps to simplify the system.
“That’s one of the main concerns that we have. We’re against adding burdens to small business or the idea that accountants can be bypassed. The minute there’s even the smallest bit of complexity within a tax treatment, no one product is going to cater for that,” Turner said.
In fact, the way MTD for IT is going, accountants will be even more busy supporting clients. “Businesses will end up filing quarterly with an annual crystallisation report,” he continued.
“The quarterly update will need to consolidate multiple buckets of data from different sources such as HMRC and links to the banks – and confirm whether it’s business data or personal data.”
Cloud accounting software can help with those processes to make it easier, but feedback from customers confirmed Turner’s view that there will be little or no benefit for small business from the exercise, save for some of the secondary internal efficiency benefits he noted previously.
At the ICAEW event, he expanded on the need for HMRC to acknowledge the profession’s role in ensuring that MTD was ultimately more than just a basic compliance overhaul. “We launched our own tax products to support the next phases of Making Tax Digital and we massively benefited by engaging and embedding accountants into the design workflows,” he said.
“I cannot advocate strongly enough the role and the ability that HMRC has in harnessing the advocacy of tens of thousands of outstanding accounting and small business advocates out there in all accounting communities.”
If the tax digitisation exercise is to fulfil its potential, he argued, it will reinvigorate the role accountants play within the small business economy and open up opportunities for accountants to “move up the value chain” by playing essential advisory roles and improving digital literacy among small firms.
Before HMRC and the profession breaks through to that new era, Rebecca Cave raised some basic obstacles that blocked the way. A lot of self assessment filing issues, for example, go back to simple calculations such as how to offset the personal allowance, or juggling the different rates of income tax in Scotland and the UK. HMRC’s software specifications do not always match the tax legislation, yet the industry has pressed on updating tax products without anyone checking whether the calculations match the law.
Turner acknowledged that Xero and other specialist developers faced big challenges delivering UK tax software products while negotiating the transition to MTD. “I want to be optimistic and think technology can solve that,” he said. “But I do retain some reservations about the time remaining.”
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