The Dawning of a New MTD Era
Monday, June 3, 2019
Having spoken about it for long enough, Making Tax Digital is finally upon us. MTD for VAT has been a seismic shift for accountants and it is only the beginning of a longer digital journey.
Having spoken about it for long enough, Making Tax Digital is finally upon us. MTD for VAT has been a seismic shift for accountants and it is only the beginning of a longer digital journey. Here, the CPAA looks at the impact that MTD is having on practitioners, the implications for clients, whether it is smooth sailing so far, and the challenges that still lie ahead.
Alison Hale, CPAA Council Member and Director at H. H. Accountants Limited in Chester, says of her experience to date, “As a practice, we have adapted well to MTD so far. We know our clients and understand the level of input they need; some require more handholding than others. The key is that we have been proactive with our client base and they know where we are if needed to call upon. We don’t want there to be a shock in store when they come to file their returns in the summer, so we have done what we can to mitigate that.”
“I have been surprised by clients’ reaction to MTD,” continues Alison. “Some have been especially proactive and eager. However, there are others that are so saturated in paperwork and other demands from HMRC that they have simply put it to one side. I expect that they will dig out that paperwork from their files as the deadline approaches – and we are ready to advise them accordingly. I imagine many other firms will experience precisely the same issue.”
This sentiment is shared by many; that the real test will come later in the summer when in excess of a million VAT registered businesses use the digital platform for the first time. While significant, the 1st April arrival of MTD was not the ‘cliff edge’ that August may be – some have dubbed this 7th August deadline as ‘Super MTD Day.’
“The soft landing for MTD and the duration it has taken to come about has probably hindered some practices and businesses, who have lost the sense of urgency,” says Alison. “There is a ‘we will do it when we absolutely have to’ attitude, which is concerning. Personally, I have found a year’s warning helpful, as I am sure many other CPAA members have.”
HMRC’s MTD Director, Theresa Middleton, revealed at this year’s Accountex – the industry’s biggest trade show – that there have been 70,000 MTD submissions so far. HMRC is pleased with the progress being made, although apparently ‘teething problems’ are still being ironed out. The first wave of filings show that taxpayers are getting variable filing data from HMRC using their MTD software or accounting systems. Additionally, there was one significant planned outage of the MTD system in May and more in June to rectify errors ahead of the busy summer.
Another potential fly in the ointment that concerns many practitioners is whether clients fully understand what must be done to be compliant. Estimates are that around 346,000 small businesses are in danger of being caught out by MTD after mistakenly believing they are compliant, according to research by one software provider. Its poll found that two-thirds believed they were compliant, but 46% wrongly believed they were. Some businesses that submit their VAT returns through their Government Gateway account assumed they are already MTD compliant, without realising they need to use MTD-compatible software to securely send and receive data from HMRC.
Alison shares this view that some firms already operating digitally believe there is nothing more to do. “I worry that there are businesses that have failed to realise there is a digital tax account that they should register for. Accountants have a big role to play in ensuring clients who handle their own VAT returns have registered correctly, understand the requirements and are being compliant. We must not assume that all clients have the same level of knowledge.”
At HMRC’s last estimate, over 300,000 businesses had not yet registered for MTD. The worry is that now the 1st April introduction, and subsequent media chatter about it has passed, that sign-ups may wane. Some industry experts speculate that one reason for lack of MTD sign-ups is down to software. It may be a case of not having the right software in place, or having it but not realising they must sign up through their business tax account - or simply being slow on the uptake.
Many businesses remain unsure about what they need to do to ensure they are HMRC compliant, nor know what will happen if they fail to comply. HMRC has said it will give firms a year to create a digital link between itself and compatible software, without penalising businesses that do not have the link in place. However, this does not mean that HMRC will not issue other VAT related penalties, so businesses and practitioners alike must not be lulled into a false sense of security.
Having the right software is pivotal to enable MTD and at the heart of this digital revolution. However, software selection can be overwhelming and costly. There are now over 200 different compatible options and, when selecting from this vast array of options, much comes down to what works well with a practitioner or businesses’ systems, ability to use, and budget.
“The software has been particularly frustrating,” adds Alison. “It is expensive, involves Direct Debit and obstacles around existing software integration. It simply is not feasible for some clients to upgrade complex software systems bespoke to their industry; it would be too expensive an endeavour. It is an even harder job getting those who favour spreadsheets or receipts in bags to contemplate digital filing! I have been looking at bridging software as a good option – there are cost-effective solutions out there for those who hunt them out.”
For some practitioners, MTD and the complexities of the solutions required are the straw that has broken the camel's back and reports show a rise in accountants feeling under significant strain. There is an ever-increasing emphasis on systems, which is at odds with how some firms want to position themselves with traditional advisory relationships at the forefront. In addition, the burden from HMRC; reliant on practitioners to educate and implement much of MTD, has and will continue to exert pressure.
Alison continues, “There seems to be an attitude the ‘software will sort everything’, but every new piece of legislation or tax change creates more work. Clients see that these changes cost them money, however making errors by trying to handle it themselves can end up costing more to have their accountant fix the problems. When it comes to MTD for Income Tax and Corporation Tax, I have concerns. I suspect it will be difficult and that we will see inaccurate reporting as a result. While HMRC says there will be some leniency, I imagine practitioners will be lodging many appeals against penalties.”
In the coming months, MTD for VAT will bed in and become part of ‘business as usual’, before the focus switches to MTD for Income Tax and Corporation Tax. HMRC’s MTD Director, Theresa Middleton, said that the next step for MTD will be to encourage the software providers to create more software to cope with filing income tax directly to HMRC.
For practitioners, the learnings and challenges from the current MTD adoption will hopefully help to stay ahead of the curve for the next round of changes. This is a time to communicate clearly, learn lessons from new processes, get to grips with compatible software, seek out the opportunities for your own business, both add value to clients and be invaluable. As Alison Hale concludes, “While it is very new now, guaranteed after the first year, we will never look back!”