MTD gathers speed but not sanity
As a chartered accountant, chartered tax adviser and chartered IT professional, Donald Drysdale reiterates some widely-held concerns about Making Tax Digital for VAT and its too hurried implementation.
Forgive me for beating the same drum yet again.
Making Tax Digital (MTD) is a fundamental change in the way UK taxes are to be administered. It is controversial and will (arguably) expose many small businesses to serious commercial and technological threats which they are ill-equipped to manage.
The MTD proposals, even restricted as they now are to VAT at the outset, create many well-founded concerns for small businesses that understand them – and should create even greater alarm among those who don’t.
Responsible practitioners are taking a balanced view, weighing the pros of MTD (such as possible opportunities to streamline the accounting and tax affairs of disorganised clients) and the cons (the increased risks that some clients will face by selecting the wrong cloud accounting service, or failing to protect themselves satisfactorily against online hazards).
Another interested faction is the software industry, which (I acknowledge) has produced some impressive new accounting solutions in recent years. However, it is an industry largely uncontrolled and unregulated, and there is nothing to prevent any business from bringing new accounting and tax software products of dubious quality to market.
These two factions should have been at the table with HMRC and HM Treasury when MTD was conceived, and all of them should have been working together ever since. They should have agreed on the aims and objectives of the project and deliberated all manner of practicalities throughout its gestation period. Had this happened, some reasonable and workable proposals might have emerged.
To illustrate this, by the time companies were required to report to HMRC using the equally controversial and demanding iXBRL standard from April 2010, a joint steering group involving the accountancy and tax bodies, the software industry, HMRC and Companies House had been working together very effectively on the project for four years.
This time around, the accountancy and tax bodies, including ICAS, have put huge efforts into MTD consultation meetings with HMRC, but there seems little sign that HMRC have been paying heed to the concerns expressed. At the same time HMRC are reportedly working closely with the software industry. This ‘divide and rule’ approach seems unlikely to produce benefits for taxpayers – or ultimately for HMRC. But it could do wonders for the profitability of software vendors selling new products and services which carry no HMRC accreditation or warranty.
The accountancy profession has developed accounting conventions over decades – 164 years in the case of ICAS. It seems ironic that civil servants (mostly non-accountants) at HMRC think that within the space of a couple of years they can do better by inventing new accounting procedures and processes based on apps, APIs and gizmos, without relying on the profession for advice.
A disingenuous consultation
On 18 December 2017, HMRC published draft secondary legislation and related documents for consultation, requesting feedback by 9 February.
HMRC knew that most organisations (including the Government) were about to close down for a two-week break over Christmas and New Year. They also knew, of course, that accountancy and tax practitioners – the most vocal representatives of small businesses – would be focused throughout January on the task of helping their clients comply with the personal tax filing deadline.
In these circumstances it must have been difficult for many parties interested in MTD to respond. Nonetheless all the major accountancy and tax bodies did so, and the ICAS response drew attention to significant shortcomings in the MTD plans and the draft regulations.
The Value Added Tax (Amendment) Regulations 2018 (SI 2018/216) were made on 27 February 2018 and laid before Parliament the following day. These Regulations were made in unseemly haste, only 11 working days after the deadline for consultation submissions and without any accompanying consultation response, even though they don’t take effect until 1 April 2019. Did HMRC actually consider the representations that had been made to them? Given the way that MTD has been gathering pace, it seems unlikely.
The new Regulations are scarcely altered from the earlier draft, with only two technical changes. One of these offers a gleam of hope, stating that the information normally required to be kept in electronic form may be varied in cases where HMRC are satisfied that keeping and maintaining it is likely to be “impossible, impractical or unduly onerous”. But how widely will that power be used?
The risks remain
The ICAS response set out a number of significant concerns about MTD for VAT.
The timetable for the introduction of mandatory MTD for VAT is unrealistic. Given the uncertainties caused by Brexit, it is unreasonable to expect businesses or HMRC to devote the necessary resources to MTD within the proposed timescale. Mandatory implementation of MTD for VAT should be deferred until the system has been demonstrated to work properly for all businesses.
Too little time is allowed for testing by larger or more complex businesses and repayment traders, and for those with an annual adjustment or within the capital goods scheme. If the matter wasn’t so serious, it would be laughable that the project is regarded as so fragile that repayment traders will not be allowed to join the pilot at the outset “in case something goes wrong”.
The requirement on a business to adopt MTD should be linked to the beginning of their next financial accounting year rather than the start of their next VAT period. The proposed soft landings on penalties do not go far enough, and they should have the force of law rather than relying on a concession from HMRC.
It is wrong to compel businesses to use third party software to meet their basic tax obligations without adequate safeguards from HMRC. Many of those who will be obliged to report to HMRC electronically lack the skills and resources needed to safeguard their confidential accounting records, and to understand the additional risks of linking such systems to their bank accounts.
It is deplorable that MTD is being pushed forward without any guarantees from HMRC – on minimum standards for software functionality; the ongoing availability of software products or services once adopted; the continuing feasibility of using spreadsheets; provision of assistive or other non-standard software; adequate online security; and assured access to business data following the insolvency of a cloud accounting provider.
An insane timescale
Consider a business with a 30 June accounting date that quite reasonably wants to avoid changing its accounting system part-way through its financial year. To comply with mandatory MTD for VAT by April, May or June 2019 (as applicable), it will have to implement MTD-compliant software by 1 July 2018 – only a few months from now.
By July it seems likely that only a limited range of commercial solutions will have been tested adequately; HMRC’s MTD pilot will be at an early stage, and selecting a product to meet the requirements of the business and HMRC will be virtually impossible.
I question whether mandatory MTD for VAT should go ahead at all. If it can’t be stopped, it should be deferred until at least 1 April 2020.
Article supplied by Taxing Words Ltd