The long-term benefits of MTD
The benefits from Making Tax Digital look to be lasting in the long term.
Large legislative changes are never without pain. HMRC’s move towards Making Tax Digital (MTD) has caused and is still causing headaches for some accountants and clients. However, phase one – the electronic filing of VAT – is now in full swing and things seem to be falling into place relatively well.
The ultimate goal for HMRC, of course, is to end up with a much more efficient tax-collection system and one that is also easier for taxpayers to use. Once it is fully rolled out, MTD should also reduce HMRC’s overheads considerably. As soon as VAT is out of the way, income tax returns for self-employed people and corporation tax are next in line for the MTD treatment.
Once the full MTD initiative has been implemented, probably by around 2022 or later, self-assessment as we know it will fade into history and businesses could be filing quarterly tax returns automatically from their accounting systems. Maybe. As HMRC itself said, its ambition is to become one of the most digitally advanced tax administrations in the world but, beyond VAT, the route to getting there is still largely uncharted.
A steep learning curve
It is safe to say that this has been a massive learning experience for everyone involved, not least HMRC itself, which started out with some fairly naive expectations about how quickly things could be done.
Chris Downing, Director, Product Marketing, at Sage, notes that, as late as 12 months prior to the 31 March 2019 deadline for VAT returns filing, HMRC was still talking about starting MTD with mandatory quarterly income tax filings. The switch to making VAT the first MTD exercise was late in coming.
“Another confusion we saw was HMRC planning to introduce a legislative change from 1 October this year for the Construction Sector Scheme, which would have affected many companies which sell into the sector,” Chris notes. “This would have completely overlapped with the 7 October deadline for the next wave of VAT filing. HMRC had a review and listened to feedback, which made it clear that this would be too much, cumulatively, for many companies. HMRC opted to postpone the CIS change for a year until October 2020.”
There are two diametrically opposite takeaways from this. The first is that HMRC listened to reasoned responses and adapted its road map for legislative changes accordingly, which is good. The second is that it shows that even at this advanced stage HMRC is still prone to underestimating how difficult it is to get everyone up to speed with major changes. Not so good.
“This is the biggest legislative change in the tax field for more than 20 years, Chris said. “It is obviously going to take time to bed down properly.”
Philip McNeill is Head of Taxation (Tax Practice and Owner Managed Business Taxes) with ICAS.
He said: “Agents – advisers handling VAT filings for clients – had significant teething problems with HMRC’s Agent Services Account. The account is in a state of agile development, with enhancements ongoing. It is to be hoped that by the second round of VAT return submissions, agents will be having an easier ride.”
A ‘spectrum’ of responses
Liz Smith is Business Development Director at Lugo IT, which aims to provide accountancy firms with an outsourced IT help desk and all-round IT troubleshooting. Lugo, therefore, has a clear view of how well or poorly accountants and their clients are doing with MTD.
“We see the whole spectrum of possible responses. We see firms that were fully digitised on VAT long before HMRC’s deadline, and firms that are still not up to speed with where they should have been by now,” she said.
Liz pointed out that there are two main approaches accountancy firms can take to MTD. They can either provide educational and practical support for client companies which aim to file themselves, or they can open up an agent account with HMRC and have a separate account on it for each of their clients to handle the filing for them.
She added that there are tools on the market which work extremely well with MTD. “What we see a lot of is accountants advising clients to use an online and mobile phone-based receipt-capturing system, such as Receipt Bank, which can feed details of qualifying receipts back to their digital tax software,” Smith said.
With Receipt Bank the user takes a picture of a receipt with their mobile phone and the app handles the rest. “From the accountant’s point of view this is so much better than a client bringing a shoebox full of receipts and invoices into the practice every quarter for the accountant to act as a bookkeeper, composing the VAT Return. Everything is produced automatically by Receipt Bank and the client’s accounting software,” she said.
Focus on advice
One of the ways Lugo is helping practices to get their clients moving on MTD is to help on the infrastructure side. “Some VAT-registered clients have done everything in the past using a mobile phone and Excel, or even a handwritten ledger. We can help the client on the hardware and comms side to get software installed and to get up and running online,” she said.
In Liz’s view MTD is not, of itself, going to turn into a serious revenue earner for accountants, as it is already becoming such a commoditised service. Where it will help them is by enabling them to become much more focused as advisers to their business clients.
She explained: “They will have a lot more information. From the firm’s point of view they will have a closer relationship with the client and will be interacting with them on a monthly or quarterly basis, instead of once a year for accounts preparation. They can do benchmarking for their clients on specific sectors because they will have much more information on those sectors.
“Compliance will continue to be important, but it will not be the growth area. This will come from the value-added services that will flow from accountants getting more timely information on their clients’ businesses.”
Why everyone gains
Nick Williams, Director of Sales at QuickBooks, argued that, ultimately, everyone gains from MTD. He pointed out that it has given QuickBooks the opportunity to add value to filing in a number of ways.
The company has a SmartScan module that carries out a number of automatic checks on the VAT return. It spots things such as duplicate entries, inconsistent VAT codes and missing transactions, and highlights them for attention.
“We have more than 70% of our VAT-registered customer base using SmartScan and we are getting tremendous feedback from it,” he said.
Nick argued that by pushing large numbers of companies towards using proper accounting software instead of basing their businesses on manual bookkeeping and Excel spreadsheets MTD will be a catalyst for significant growth in the economy. QuickBooks worked with market research company Voltara to establish what the growth impact could be. Their research suggested that the UK economy could see around a £67bn growth impetus from MTD.
“What does the customer get out of this? Using accounting software like QuickBooks, they get on top of their finances. They can manage their cash flows better. They don’t get surprised by unexpected tax bills and they get regular management accounts,” he said.
QuickBooks has been running what it calls an MTD tracker survey for the last 15 months, taking the pulse of the general reaction to MTD. “We’re noticing a real change in perception. We’re asking questions like if you have purchased new software because of MTD, are you seeing additional benefits? The answers are very positive, even down to better chasing of late payment on invoices. It has been very enlightening,” he said.
One of the innovations QuickBooks has come up with is their SmartLook, which is basically a video prompt to their help desk. “If the user hits problems they click on SmartLook and one of our customer agents pops up on the screen for a video and screen-share support session.”
Sage’s Chris Downing pointed out that in the UK there are more than two million VAT-registered businesses, and around 1.2 million of these are over the VAT threshold of £85,000 in turnover.
“What is now clear is that large numbers of businesses which are not over the VAT threshold have signed up for MTD. So, while the initial main benefit to them of using our VAT MTD system is that they are in compliance on the electronic filing side, there are huge secondary business benefits. Using accounting software saves the owner-manager time and improves the general productivity of the business,” he noted.
Connectivity and efficiencies
Greater connectivity and the procedural efficiencies of using accounting software have a very positive impact on businesses, Chris argues. He pointed out that MTD also opens the door to a much more collaborative working arrangement between businesses and accountancy firms.
“MTD is the biggest thing to hit accountancy firms in the last 20 years. It is the start of a sea change to encourage the use of digitisation in their own practices. It will help them to be more proactive in terms of business planning and advisory work,” he argued.
All suppliers of software will be working hard to get HMRC to firm up on its views of where MTD goes next, and what exactly it will be specifying. Programmers can’t work with vague statements, or at least, not without running up large bills and writing code that turns out to be not fit for purpose. Downing points out that MTD on self-assessment tax returns is going to be very complicated.
“At the moment we just don’t know if going digital on self-assessment will be on an income-threshold basis,” he said. By setting a high threshold, HMRC could solve a lot of problems, as the assumption is that lower earners in this category may not be using software at all at present – which, in itself, would be a problem.
From HMRC’s side a spokesperson said: “As of 13 September there are now more than 1.1 million businesses signed up to MTD and submitting their VAT returns through the system. We are delighted with this. It has always been recognised that MTD is a big change for some, and we are committed to helping businesses through the transition.”
A learning curve for all
The spokesperson added: “HMRC is transforming itself to provide a fully digital tax system. Last year 10.8 million people, more than ever before, filed their tax return by 31 January. We currently have a number of programmes aimed at getting tax right for everyone. More than 20 million people have signed up to use personal tax accounts to manage their tax affairs online quickly, simply and whenever they want.”
Gill Pryde CA, Senior Partner with Anderson Anderson & Brown, commented: “MTD has been a lengthy process and learning curve for all involved. There is no doubt that HMRC left the responsibility of informing businesses with their accountants.”
The whole process has been frustrating, she said, particularly for small businesses that were still using paper records or spreadsheets.
“However, many have now moved to a cloud-based accounting system and are seeing increased efficiency and the benefit of access to their data on a real-time basis. We’ve also seen larger businesses with complex systems review and improve their VAT processes prior to the switch to MTD.”
“Now that the initial pain is over we expect MTD to have a positive impact, with less time spent on VAT filings and eliminating errors,” she concluded.