Last week, HM Treasury released a statement delaying and descoping one of the government’s most ambitious IT programmes: Making Tax Digital (MTD).
Business owners and accountants appeared universally united in their delight at the extent of the scaling-back of the programme’s objectives and, in the context of MTD for business (MTDfB), many are now starting to wonder:
“Is Making Tax Digital going to introduce any material changes before 2020, if indeed at all?”
The headline news from the Treasury’s written statement was twofold:
“Businesses will not be mandated to use the MTD system until April 2019 and then only to meet VAT obligations. This will apply to businesses with turnover above the VAT threshold [of £85,000]”
“The Government will not widen the scope of MTD beyond VAT before the system has been shown to work well, and not before April 2020 at the earliest”
To understand the far-reaching consequences of this statement for both businesses and accountants in practice, you need to return to the original idea behind Making Tax Digital along with how it was envisaged to work in practice.
Making Tax Digital key announcement timeline
The Political Idea: “Making tax easier: The end of the tax return”
-George Osborne, Chancellor of the Exchequer, March 2015
“12 million people and small businesses are forced to complete a self-assessment tax return every year. It is complex, costly and time-consuming. So, today I am announcing this. We will abolish the annual tax return altogether. Millions of individuals will have the information the Revenue needs automatically uploaded into new digital tax accounts. A minority with the most complex tax affairs will be able to manage their account online... A revolutionary simplification of tax collection. Starting next year.”
The Actual Idea: “Reducing the tax gap”
-HMRC Policy Paper, December 2015
“The majority of customers want to get their tax right but the latest tax gap figures (2014 to 2015) show too many find this hard, with a cost to the Exchequer of over £8 billion a year due to avoidable taxpayer mistakes. In 2014 to 2015 over £3.5 billion of revenue was lost due to these mistakes in VAT returns alone.”
The Planned Implementation: “Making Tax Digital”
-HMRC MTD Roadmap, December 2015
By investing £1.3bn, the transformed tax system of 2020 will require most businesses, self-employed and landlords to keep track of their tax affairs digitally and update HMRC quarterly. The taxes in scope include: Income Tax, National Insurance, Corporation Tax and Value Added Tax.
The Latest Implementation: “Making VAT a bit more Digital”
The new statement from the Treasury makes it clear that the implementation of MTDfB will now be limited in scope to mandating only the following:
By April 2019, businesses with a turnover above the VAT Threshold (of £85,000) will have to report their VAT quarterly and electronically using MTD compliant systems.
Red Flag Issues: There is no digital advancement
All businesses already report VAT quarterly and electronically - most have done so for many years and it was a legal requirement for almost every business by 2014.
On that basis, the only MTDfB promise left on the table is to improve the quality of this VAT Reporting by 2019. This is to be achieved by mandating digital record-keeping along with a prescribed method for integrating the record-keeping sources (including spreadsheets) with HMRC’s own systems.
Already this barely resembles the bold original form of MTDfB and yet there is another set of issues at hand, further diminishing the new objective, stemming from the fact that:
Many businesses are already achieving this quality of VAT Reporting (or better) and were doing so long before the idea of Making Tax Digital.
Issue 1: Behind a Digital Revolution or simply behind Digital Evolution?
Many of the more tech-savvy enterprises are already using third party integrations or cloud accounting products like Xero, either in isolation or in conjunction with their advisors, to file their VAT returns each quarter directly from their financial data with just a few clicks.
In relation to these tech-savvy businesses, it is very hard to see what material benefits MTDfB could now offer either towards HMRC or the businesses themselves before ‘at least 2020’
Without fully digressing into the merits of cloud accounting, keeping financial data in these dedicated systems offers a vast range of benefits to the businesses that use them and towards HMRC in terms of reducing the tax gap:
Immutable financial history
Using real bank accounts as transaction sources and validators
Scope for complex error prevention
Easy integration with third party systems (including those of HMRC)
Time-saving user experiences
Even MTDfB’s promise to enhance these systems through additional automation in the form of ‘prompts and nudges’ that improve data quality seems unlikely to be a great step forward from what already exists - and certainly from what might reasonably be expected to exist by 2020. This rings particularly true in light of MTD deeming spreadsheets to be a valid source of digital record-keeping.
If some companies, including very small companies, are already ahead of MTDfB’s 2019 objectives then it seems reasonable to ask the question:
If nobody had initiated MTD then would the general trend of digitisation and cloud accounting have produced a near identical VAT Reporting result over a similar time period?
Issue 2: The ‘Stretch Target’ is not VAT Reporting
Because the MTD end-state for VAT Reporting essentially already exists, it would be extraordinary to think that HMRC would be unable to succeed in rolling-out a similar state-of-affairs in some form or another.
But VAT Reporting is not the hard part:
It is widely accepted that fulfilling the Corporation Tax aspirations of MTD presents a problem that is orders-of-magnitude harder to solve than realising the programme’s objectives for VAT Reporting
Under the originally planned implementation, by 2020, MTD was supposed to mandate quarterly reporting of financial data that would effectively provide incorporated businesses with a fully prepared Corporation Tax Return (described as a ‘Reconciliation’) ready for quick sign-off each year.
Quarterly reporting of financial information that is sufficiently detailed and accurate to calculate corporation tax liabilities has always looked like a very big ask. This is particularly true when coupled with the lack of clarity on how accountants are supposed to feature in the process - with speculation currently ranging from “not at all” through to “as they do now, but four times a year”.
The Treasury’s announcement that Corporation Tax is now out of scope until at least 2020 is the really big news for incorporated businesses and accountants.
When viewed in light of the significant delays to MTDfB’s easier deliverable (VAT Reporting), the de-scoping of Corporation Tax is being seen by some as a signal that MTD for Corporation Tax may simply never arrive.
From the perspective of incorporated businesses and the accountants that work with them, this would mean MTD amounting to little more than a handful of improvements to HMRC’s digital services and leave MTDfB in its original form largely defanged.
Stakeholder Reaction: Why is everyone so happy?
Firstly, just to confirm, everyone really is very happy:
A short tour of leading small business and accounting forums will reveal some great articles covering the announcement - each being followed by a raft of comments expressing relief, joy and even proposals to go dancing. Here’s one of the best from AccountingWeb, written by their global editor, John Stokdyk.
On the other hand, it seems impossible to find any public displays of heartfelt disappointment at the news. Some of the software companies involved have voiced mild displeasure but I expect this is very much tempered by the substantial easing of product delivery pressures.
While “Making Tax Easier”, reducing the Tax Gap, and enforcing digital financial record-keeping can all be agreed upon as compelling objectives, you cannot get much further than this before disparity of opinion begins to emerge and then quickly turns to concern. The general reaction to MTD’s delay is simply a reflection of the fact that many stakeholders are concerned about the programme’s implications.
Here’s a not-even-close-to-exhaustive list of concerns coming from the various MTD stakeholder groups:
I don’t use dedicated accounting software - I rely on ordinary spreadsheets or paper records
I expect to have to spend more on accounting services to comply with the new quarterly reporting regime
I don’t like uncertainty and no-one can tell me exactly how MTD will affect the day-to-day running of my business
Accountants and Bookkeepers
I am concerned that quarterly reporting will be an expensive burden for my clients. My own margin may also be squeezed to share this burden and in some cases it may be prohibitive altogether
I believe that MTD will introduce lower levels of compliance by relying too heavily on automation
I am uncertain as to whether or not MTD will result in the automation of services that I have, until now, provided as part of my client services offering
I don’t like uncertainty and no-one can tell me exactly how MTD will affect the day-to-day running of my practice
I want to reassure and educate my clients about MTD but I can’t because I have not been given sufficient information to do so
We are concerned about the volume/rate of development work required to support MTD
We cannot find a business model to support the provision of free MTD software
We don’t agree that spreadsheets should count as ‘digital record keeping’
We are concerned about the speed of the MTD programme from a systems implementation and testing perspective
We are uneasy that MTD will affect ‘centrally-planned’ changes to our market.
Given the number and variety of stakeholder concerns, it’s hardly surprising that news of the delays and de-scoping of MTD, with its far-reaching negative implications for the programme, has been widely met with jubilation.
The Root Concern: The Role of Automation
Most would agree that from a stakeholder perspective MTD has struggled to become a Change Management success story:
MTD was announced clearly as a programme that would fundamentally change the working lives of tens of thousands of finance professionals and many more business owners. And it was announced without the inclusion of any substantive details about the envisioned end-state.
On the day of the announcement, many accountants were left feeling that their future was uncertain at the hands of a government initiative which offered more questions than answers and presented no evidence in support of its proposed timelines.
Factor-in the reality that for many business owners their views on MTD are informed by the accountants they work with and it is not hard to see why the programme was on the back foot from the outset.
Even now, the prevailing consensus is that a sufficiently detailed account of the MTD end-state has not been made publicly available and this leaves stakeholder uncertainty and suspicion free to haunt the programme.
Notwithstanding the above, the magnitude of the negative reaction to MTD was almost unprecedented - even for a government IT programme. To my mind, it was the lack of clarity on the role of automation in MTD that put its key stakeholders on edge form the very beginning.
The Role of Automation in MTD not only directly addresses some of the most pressing stakeholder concerns but, more importantly, it defines the extent of the regulatory and technological leap that HMRC are pushing for with MTD.
Here’s a ‘straw man’ suggestion of what MTD stakeholders are looking for in the context of automation:
Businesses want assurances that the extra compliance required by MTD brings with it a level of automation that ensures any existing or additional work required can be carried out, by themselves or a by finance professional, in the same amount of time or less and at an equal or lower cost.
Accountants & bookkeepers want assurances that MTD does not bring with it a level of automation that either lowers compliance or that reduces their existing client services value or margin without also bringing opportunities to replace it.
Software providers have a very long list of demands but chief among them are: enough time to implement MTD in the right way and to adjust their product offering to fit with the new post-MTD market landscape. The proposed level of automation is a huge input here.
The 2015 Joint Spending Review & Autumn Statement that initiated MTD clearly stated that the government was committed to:
“removing the need for annual tax returns [for] individuals and businesses”
Even after the noise, changes, reversals, and exemptions that have since followed, it is difficult to get away from the intent of the above statement:
To automate a significant amount of the work that is currently undertaken by accountants & bookkeepers by mandating software adoption.
My own view is that this intent has been significantly watered-down since 2015. That being said, the most recent Making Tax Digital for business Policy Paper published in March of this year still makes the following claim:
“Some businesses which currently use agents and are recording income and expenditure digitally may choose to make the quarterly updates themselves. With software categorisation of income and expenditure, final end of period activity should be a simpler process than it is currently for a business maintaining their books and records on paper. Routine work will be done automatically.”
Regardless of the current intention, it is easy to identify a number of negative first impressions created by the original announcement of MTD:
A worrying agenda for finance professionals
A programme that may have entirely unrealistic aims
A governmental step into a market with a non-trivial digitisation agenda. It’s not an ordinary, efficiency-driven, public sector IT project - it is something seemingly quite different.
I believe the profoundly negative reaction to MTD - particularly from the accounting community - has been driven by the fear of what was initially perceived as an unnecessary and overly-ambitious agenda to automate the work of accountants.
And not just because it might succeed but also, and perhaps more commonly expressed, because it might fail and leave behind a broken and more expensive accounting services market for business owners.
Automation: The Extent of the leap proposed Making Tax Digital
Successful automation of the UK’s statutory reporting framework and of many similar frameworks around the world has its root in the thinkings of an American accountant named Charles Hoffman back in 1998.
His work, propelled by the American Institute of Certified Public Accountants, produced the Extensible Business Reporting Language (XBRL) which underlies the machine readability of statutory accounts and tax computation documents.
Prior to MTD, HMRC had restricted itself to mandating only the acceptable and machine-readable format of tax documents along with their delivery method.
With MTD, as it was originally proposed, HMRC appeared for the first time to seek to mandate the processes by which those documents and their source data were generated.
The difference is difficult to overstate.
And I’m not speaking just from a technical standpoint: These are two conceptually completely different things that are achieved in entirely different ways.
When you mandate only the format of the data and where it must arrive, the following holds true:
The requirements can be easily and precisely described and leave very little room for variation in quality
Multiple private stakeholders can work together in any way they choose, and on a case-by-case basis, to meet the requirements
When you mandate the processes by which the data are generated, in the context of something like accounting and taxation, those two principles are effectively reversed:
Describing the required process becomes very complex and leaves significant scope for quality variation
Private stakeholders are universally restricted to a one-size-fits-all process that reduces the scope for the development of more appropriate niche solutions
Mandated process automation - ‘nudges and prompts’ in MTD terms - for the purpose of improving compliance was always going to be a hard sell.
The textbook example of such an automation involves the accounting system user being ‘nudged’ to claim the Annual Investment Allowance when they appear to be purchasing a qualifying capital asset.
This is a great idea. But there are a very large number of ways of achieving even this relatively simple objective - with each having its own quality score.
And quality will certainly matter: The above is an example of a user actively reducing their tax bill. If this automated advice were to come from an MTD-compliant software package and was later found incorrect, with whom would the responsibility rest?
Given the potential complexity of these sorts of tasks it seems unwise, and counter to the nature of technological progression, to demand a specific implementation of this particular ‘nudge’. Equally, policing the quality of multiple implementations would be an unfeasible undertaking for any organisation.
This is just one example of perhaps hundreds of similar tasks that would need to be automated in order to realize the near fully-automated end-state that appeared to be MTD’s original intent.
The points made above serve only to reinforce the view that many expressed from the very beginning of MTD:
The bringing about of a fully-automated business tax software landscape through government legislation is a frighteningly ambitious idea.
Whether MTD is, or was ever intended to be, quite so ambitious remains unclear but what we know for certain is that the unease created at the announcement of Making Tax Digital was not at all unfounded and that the programme is yet to overcome an image problem that is greatly amplifying the difficulties in rising to an extraordinary challenge.