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HMRC asks if software can reduce red tape

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20th May 2009
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HMRCHow many UK businesses are equipped to compile their own VAT and Corporation Tax figures and submit them electronically to HMRC? John Stokdyk studies the department's latest research.

To accompany the publication of draft regulations paving the way for the introduction of mandatory online filing of VAT and Corporation Tax between 2010 and 2012, HMRC published a study of business accounting practices.

Carried out by GfK NOP, the study is based on a quantitative of 1,200 businesses followed up by telephone interviews. The point of the exercise is to help the department achieve its strategic objective to improve the "customer experience" and reduce the administrative burden for businesses completing and submitting tax forms.

Key findings

• Most businesses do not find VAT too much of a burden.
• Accounting software makes the process easier, but many smaller businesses don't see the need for it; 18% of all VAT registered businesses do not have access to the net.
• Few businesses submit VAT returns using XML output from tax software.
• Only 27% of businesses that do not file online are aware that it will become mandatory for many of them in 2010.
• More businesses would use software if they had to file VAT returns online, but need more support from HMRC - and possibly incentives.
• Corporation Tax is hard, so most companies use agents.
Source: HMRC survey (67-page PDF, 400kb)

With compulsory online filing due in 2010 for £100,000-plus turnover businesses and all those registering for VAT the study also tried to find out how many organisations would be likely to migrate voluntarily before then, and where resistance to online filing was strongest. Currently, the rate for online submission of VAT is around 14% and the study found signs that many businesses were reluctant to adopt tax accounting software to file VAT and Company Tax returns online.

Computerised VAT

Somewhat surprisingly, only 7% of the survey sample say maintaining VAT records and getting to grips with tax guidance takes too much time. The actual burden occurs earlier in the cycle in the collection of information to complete returns.

Facilities exist in many accounting packages to submit VAT returns to HMRC electronically in an XML data format, but only 45% are aware of it. "There is currently very little evidence of enthusiasm for the automatic submission of VAT figures using software packages," the report states. Among the 10% of survey respondents who have the XML facility, fewer than one in five actually use the feature, equivalent to 1.5% of the full survey sample. According to HMRC's VAT return statistics, only 0.1% of VAT returns are submitted via XML - one of several instances where survey respondents appeared to be more committed to online filing than the national average.

Amongst those businesses that do not file online, only 27% were aware of Lord Carter's proposal to introduce compulsory online filing in 2010. "Reflecting the general sense of inertia, most businesses say they will wait until they know more about the proposals before taking any action. One in five said they would only move if they had to, although an equal proportion said they plan to move to online filing in the next year or two," the study found.

When they are forced into filing online, 73% of current non-filers are likely to consider using software to produce their VAT figures.

XML services for VAT

HMRC is able to accept VAT Returns electronically from software packages that output the figures using the eXtensible Mark-up Langauge XML. The current list of approved applications includes: 12 efile; Deloitte; eFile Ready; KashFlow; Liberty Accounts; Mamut; PwC; RJ Software; Rowanberry Consultancy; Sage; TechnologyOne; TMC Software; and Topaz.
Source: HMRC

As is the case in many market sectors Sage is the predominant package used for VAT returns, used by 61% of the organisations that used software for VAT accounting. Just under 10% use Quick Books, while Microsoft had a 5% share and Pegasus and TAS Books 2% each.

The costs of computers and software are the biggest burdens for smaller businesses, while larger companies identified employee time as the primary cost. As one respondent commented, "A lot of that is going to be purely down to Sage... I guess the software package costs us £1,000-£1,200, we ended up getting almost the highest level of it to get the European and stuff built-in... We have a contract with them for support and upgrades which costs us about £400-£500 and that's probably the bulk of the cost. Anything else is bits and bobs… the cost of our time and I guess a bit of our accountant's time to get it squared away."

The NOP study suggests that if online filing becomes mandatory, some companies that are below the VAT registration threshold but register to appear more legitimate will drop out of the system. These are not necessarily less computer literate businesses. Less computer-literate businesses are likely to pass the task to an accountant or agent, which would increase their costs. And some older respondents said they would wind up their business rather than take on the new burden.

The Corporation Tax burden

Corporation Tax is more complex than VAT. With so many companies relying on external advisers to deal with the tax, the HMRC study provided relatively meagre evidence about the potential for software to reduce the administrative burden.

Where an individual within the organisation was responsible for managing Corporation tax, only one in five uses a software application to organise and prepare CT return figures (a sample size of 23 respondents). Once again Sage was the most common package.

Conclusions

The HMRC study fails to produce any earth-shattering insights into business tax processing - but perhaps that's the nature of the subject. Where it may prove helpful is helping the department find ways to overcome some of the hurdles the research highlights. In spite of hiccups - fingered by several respondents as grounds for their reluctance to go online - the Carter programme has been remarkably successful in moving taxpayers and businesses online for personal tax and PAYE filing.

The biggest hurdle standing in the way of Carter's phase two plans is the lack of IT skills, along with an underlying cussedness that HMRC and Lord Carter need to recognise that not everybody has or wants access to a computer. As one paper VAT return filer in the South East put it, "I just feel that they're assuming that everyone's up with the modern things. A lot of people don't want to."

Faced with having to buy and learn an unfamiliar computer system, many respondents questioned why it was necessary to changed the way that they did things just to accommodate a computer. If HMRC is going to require online filing, then it ought to provide training was a key message that came out from this reluctant group. Several mentions were made of financial help - which proved to be a very successful incentive to encourage payroll filing.

An underlying assumption of the government's "reducing the administrative burden" rhetoric is that electronic filing will also reduce reliance on agents and business tax payers handle more of the submission work themselves. But as we saw with the PAYE migration, online filing has been a boon for advisers. The compliance rules themselves are not getting any simpler, and the piecemeal introduction of new and different online filing mechanisms has merely succeeded in adding new layers of complexity for businesses and their advisers.

Perhaps for their next project, the researchers should survey a few agents too.

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By harestock
27th May 2009 19:15

compulsory online VAT filing
Does anyone know whether HMRC are likely to provide their own filing program as they do with PAYE? If you were able to just submit figures on line in the form of the current paper return then more people/agents might take up the service. There would not be extra cost for the client that way. Presumably payment then could be made by direct debit from the clients account.

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