Making Tax Digital review: Lessons to learn
The result of eight research projects into Making Tax Digital were published by HMRC in mid-March. These covered the period from 2016 onwards. An overview of Making Tax Digital, focussing mainly on the introduction of MTD for VAT (MTDfV), was also published.
Philip McNeill discusses the HMRC commissioned research and asks what lessons can be learnt for future developments.
Implications for the digital future
Space does not permit detailed review here, but of particular interest are the assumptions inherent in the research, particularly around the role of agents. These are worth bearing in mind for further roll-out of HMRC digital strategy.
Looking at the research from an agent perspective, one could draw out some key themes which are considered below.
- Agents are key
- Messaging about agents was mixed
- Is digital tax compliance correct – or is an agent needed to guide compliance
- Reducing errors and increasing compliance
- Lessons from MTD for VAT
Agents are key
“Agents played a very important role in securing engagement with MTD amongst ITSA customers.” (Research report 575 on the subject of encouraging voluntary sign up).
The influence and leverage of agents should be considered in a positive light. Those with long memories, present at the introduction of self-assessment, for example, will remember this as being a point at which HMRC engaged very effectively with agents. It resulted in a radical and successful overhaul of the tax system.
Need for early engagement
The MTD experience has not been as efficient. Agents have at best, been marginalised. The same research report highlights the need for early agent engagement:
“To give them time to prepare for these anticipated queries, agents wanted information about MTD before their clients.”
If agents are to be leveraged, they need to be in first.
The disappearing agent
The research produces an element of mixed messaging on the role of agents. On the advance in intelligent software, it reported that:
“some customers in this position even felt that they would no longer need an agent as their taxes would be easier to manage”.
The feedback to HMRC is thus that agents can be viewed as essential and redundant at the same time – an interpretation that is unhelpful.
There may be a raft of taxpayers who consider that, with the use of intelligent software at a modest cost, they can manage their affairs without an agent.
The essential agent
While the MTD roadmaps have tended to promote a common approach to digital tax, reality is likely to be more nuanced, and for the one client who intends to dispense with an agent, there are likely to be many others who do not wish to get involved directly with HMRC, digitally or otherwise.
HMRC should resist the temptation to intrude on the agent-client relationship by requiring direct digital contact with all taxpayers.
The cost consideration
Agents themselves will acknowledge that with increasing complexity and higher compliance costs, it is not always cost-effective to service the smallest businesses.
The question is one of balancing these various elements: balancing cost and service, and tailoring these to the needs of business, HMRC, and the agent, while recognising that there is unlikely to be one route for all.
The agent as counterbalance
Agents act as a counterbalance. They have an ongoing relationship with HMRC to maintain and professional standards to uphold. There are times ‘the customer is not always right’; and the professional relationship maintains the distance to say so.
In Research report 578 on upstream compliance, the observation is made that:
“Some agents reported that their clients incorrectly believed that their own interpretations of the rules were correct, despite being challenged and advised to the contrary by their agent.”
Nor will accounting software necessarily produce the right solution.
One agent, for example, was reported as saying “I have seen people claim VAT back on train fares...that is because software has a default VAT value for travel and people don't change it.”
The overconfident client
Agents can also be a counterbalance to overconfidence. Research report 576 considered MTD in the context of a Capability Opportunity Motivation Behaviour model.
Interestingly this research noted the paradox of digitally-capable businesses which were highly motivated, but might also be over-confident:
“However, they only had moderate book-keeping capabilities, even though they were highly confident. This meant they were less aware of the risk of an inaccurate VAT submission caused by incorrect setup or not monitoring automated book-keeping.”
Errors and compliance
It has been a cornerstone of Government’s approach to MTD that it will reduce errors.
‘MTD will make it easier for businesses to get their tax right the first time, reducing the £9.4bn tax gap resulting from avoidable mistakes.’ (December 2015 roadmap for MTD)
Yet a CIOT survey after the introduction of MTD for VAT showed almost 90% of respondents did not think that the introduction of MTDfV had reduced errors.
How can this difference in understanding be bridged? One answer surely lies in the assumptions behind the Government’s digital roadmap.
Research report 577 looked at income tax errors and how software can be designed to mitigate these. Support through intelligent software is identified as a key aspect here:
‘Through the use of third-party developed software and apps, businesses will be able to automate and integrate their record keeping into the day-to-day running of their business. In doing so, businesses will be able to update HMRC on a quarterly basis, getting a more up to date view of the tax they owe, increasing certainty, providing the foundations for businesses to grow.’
If only, as any tax adviser would sigh, things were that simple.
While the issue of basis periods for trading income for unincorporated businesses remains unresolved: multiple sources of income and gains must be matched to tax years: and reliefs, allowances and bands depend on a mix of UK and devolved tax rates, getting an up to date view of tax liabilities, based on quarterly digital submission of trading income from software, looks overly optimistic.
The use of prompts and nudges within software paints a picture of painless, error-free submission:
‘The software used for digital record keeping will over time incorporate nudges and prompts that directly address common reporting errors at source, allowing customers to minimise mistakes. Nudges and prompts are messages that appear at the point of data entry, or shortly after updates have been sent to HMRC. For instance, messages may appear in third party software as customers enter data to highlight common errors that are made and provide guidance, including links and tailored content, on avoiding these. This will also provide increased certainty that they have got their tax liabilities right.’
In fact, the reality of the MTDfV journey, with HMRC bowing to the inevitable and permitting the use of spreadsheets is at odds with the everything-in-the-garden-is-rosy digital rationale. It was both an acknowledgement of reality, and an acceptance that the smallest businesses cannot afford to be tax experts – nor do they necessarily want to be.
MTD for VAT
Agents will have their own stories on MTD. For many, it has proved more straightforward than envisaged, but has still taken very significant resources and added to costs. But where things have gone wrong, they have sometimes done it spectacularly.
HMRC’s research report on the project so far is to be complimented on acknowledging that there have been challenges, particularly for agents. Yet it soon defaults to the mantra of:
“Making it easier for businesses to get their tax right: As businesses become increasingly digital, the use of digital record-keeping tools helps prevent businesses from making errors. This addresses the part of the tax gap that is attributable to error and failure to take reasonable care by significantly reducing the opportunity to make some types of mistake in tax returns, principally simple arithmetical and transposition errors.”
Time alone will tell, but reality is likely to be more complex. What is as expected, is that the 80:20 rule seems broadly to have broadly in terms of take up. The majority of VAT-registered business joined the system on time, but something under 20% has lagged behind.
What seems clear is that the current system needs to bed down before any extension is considered. But in the current circumstances, how likely is it that this be permitted?
Conclusion
MTD has had its pinch points. For optimal roll-out, HMRC should be encouraged to engage early with agents on any future developments.
Agents can leverage significant advantages to HMRC, enhancing the smooth working of the tax system. To do this best, the needs of agents and their clients should be factored in from the earliest stage of design.