Making Tax Digital – More Questions Than Answers?
With the postponement of the original Making Tax Digital (MTD) deadline, the focus switches in the short term to digital VAT filing. The MTD delays were announced by HMRC as being due to “listening” to the concerns of the professional accounting and tax bodies that the original proposals were far too ambitious and unachievable.
Making Tax Digital has not been cancelled… the ultimate vision and goal of HMRC has not changed – what has changed is the timescale to achieve this vision.
The result is the implementation of digital VAT return filing for certain VAT registered businesses commencing with the first VAT return period starting after April 2019. (There is still some confusion over the exact date which HMRC have yet to clarify).
What has been confirmed recently is that after April 2019, those businesses that make voluntary VAT submissions (i.e. those registered traders with turnover below the VAT threshold) will still be able to use the existing Government Gateway method to file their VAT returns. All other businesses will need to file via “API links”. An API – Application Programme Interface – is a direct link between the accounting or other software and the HMRC software.
It seems that a further consultation between HMRC and various bodies is planned, and it also appears that the final VAT regulations will not be in place until April 2018.
There seems to be a change of focus and attitude from HMRC in moving away from mandating rules to encouraging businesses to adopt the new methods. HMRC have a “voluntary onboarding strategy” and will be encouraging these small businesses to adopt the digital filing methods. It has been pointed out to HMRC by the professional bodies that they have a duty to inform and educate taxpayers of the requirements of digital filing. It appears that an element of this education may be along the lines of “digital is good for business”.
Can you imagine HMRC trying to tell the business owners how to run their businesses and what is good for them? Can you imagine the reaction to this? So, the “digital is good for business” message may not achieve the desired effect.
A digital record would contain the same information as a traditional record. As to how often your records need to be “written up” in a digital world this is yet again still subject to debate and clarification. HMRC says it does not have to be “real time” but should be as near to real time as possible. Does that mean that writing up the records at the end of a week, a month or a 3-month period just in time for the VAT return filing is no longer acceptable?
It also appears that the VAT regulations being proposed will specify the information a business needs to preserve digitally and will include: –
- business name, principal place of business and VAT number and will also include information about which VAT schemes are in use
- the VAT account – the audit trail between the primary records and the VAT return
- information about supplies made and received.
VAT filing – via software or government gateway?
HMRC seem perplexed that in 2015/16 only about 12% of returns were filed direct from within accounting software. They have asked “Why do 88% not file this way”?
One reason is probably apathy – the resistance to change. The software could be used but the VAT return has been filed for many years by logging into the HMRC gateway and so the practice continues.
However, another reason for not filing through software is probably because the software being used to record the accounting transactions cannot produce the figures directly, due to complexities in the calculations or circumstances. For example a group of companies with one vat number or the special schemes for retailers or second hand margin schemes.
HMRC have “challenged” software developers to make their software deal with some of these areas but given how expensive software is to develop it is doubtful whether this will happen in the timescales.
HMRC perceptions of businesses and software
Unfortunately, the HMRC perception of how businesses can use software and how this works in reality are miles apart.
A statement from HMRC recently has been that “businesses will soon come on board to digital record keeping when they see how easy it is- just take a photograph of receipts…..” HMRC view is that most businesses already need to use technology these days in one form or another – e.g. a farmer may have to file stock movements online, or may use GPS in his tractor to plough in straight lines etc. so they will find the new software easy!
Any accountant that has tried to educate or train clients in the use of software or even spreadsheets will know that some “get it” straight away while others struggle no matter how much handholding or assistance is provided. There are several cases of clients having tried the software and made such a hash of it that they have resorted to the “old” methods of record keeping.
Another HMRC misapprehension is that “small” businesses can use the software available without any problem and that “big” businesses are where the issues arise. It is contended that the size of the business is irrelevant – it is the nature of the business which causes the problems. A “big” business with say £25m turnover that buys goods and resells them is actually straightforward for VAT purposes. However a newsagent with a turnover of £250,000 will have standard rate purchases, zero rate purchases and purchases for mixed rate goods and calculates his VAT using the special retailers scheme mentioned above.
Software or spreadsheets?
A complete about turn has taken place from the original MTD proposals where spreadsheets were deemed to not constitute “digital records”. This caused uproar leading to considerable lobbying and it seems spreadsheets are now acceptable. However, spreadsheets by their nature are all different to suit individual circumstances. They are not in a “standard format”. There must therefore be the ability to link the spreadsheet to HMRC software if just keying the figures into the HMRC systems is not sufficient. Proper “structured spreadsheets” may be needed, and it is anticipated that many commercial products will become available in due course. However, at this moment, there is nothing definite and nothing in the public domain to show how these links work.
It would therefore be sensible if all new businesses start using accounting software from the outset, rather than using spreadsheets first and then having to switch systems later.
HMRC have said there will be “free software” available but they are not intending to provide this and will be looking for software houses to make this available. There are a couple of organisations so far that have made free software available, but one has to consider the business model of giving away software. Developing software in the first place is not cheap.
Where will the revenue come from to maintain, support and develop the product going forward? If you start using free software and it closes after making losses what happens to your data? Not sure HMRC will accept this as an excuse.
What functionality will there be in this software? Will the basic product be free but any additional functionality will come at a high cost?
Many of the best known accounting software suppliers have already made it known that they have no intention of providing free software.
The migration of clients with manual records is going to be a challenge, especially as many of those clients by their very nature will be resistant to change. We are very concerned that these clients by burying their heads in the sand and hoping it will go away will produce a huge last-minute panic.
Software replacing bookkeepers
Like most accountants we never wanted to do bookkeeping for clients and instead recommended local bookkeepers who we trusted.
However, cloud based bookkeeping systems change all of this quite dramatically. With online systems, bank feeds, bank rules, the photographing of purchase invoices etc. a lot of tasks can be automated, and the potential for clients to save a sizeable proportion of the costs of a bookkeeper are huge. A Harvard business review in 2014 envisaged perhaps 94% of bookkeepers being redundant in the future.
So Making Tax Digital may have been delayed but it is still happening. Accept it, embrace it and make it work for you as the benefits of being a digital business are likely to be huge.