September 19th, 2016
What does the HMRC digital strategy mean for the working lives of accountants and tax advisers?
At long last HMRC has published its consultation documents on digital strategy. I suspect that you don't religiously study each and every document issued by HMRC – if you did you wouldn't have any time to do any client work – but I strong recommend that you take the time to read these consultations, because the outcome of the exercise will have a direct impact on your future working life.
I'm not going to summarise the documents here. There are already plenty of good summaries available on line. If you are struggling to find something I suggest you look at our TolleyGuidance note. I want here to consider what the proposals might mean in practice for those of us making a living from advising clients.
The first thing to note is that there are very few references to agents in the documents. There is a recognition that agents have a role in the transition to digital ways of working, but it is clear that the system is designed from the perspective of taxpayers themselves rather than their agents. For example 8.42 of the main document says "we believe that simplified processes and software might give some businesses the confidence to deal with their tax affairs in-house rather than use an agent". Similarly 8.43 talks about the key role agents will have "in educating and supporting businesses through the transition to MTD" while 8.45 suggests that the digital record keeping "should free up scope for professional advisers to provide more qualitative advice and spend reduced time on compilation of information". That reference to "confidence" is an interesting choice of words. It suggests that at the moment people use an agent because they don't have the confidence to deal with their own tax affairs. That may be the case for some, but there are a whole host of reasons why people use an agent.
So what are agents actually going to be doing when MTD becomes a reality?
During the transitional phase we are all going to be busy. For many clients , particularly those whose record keeping is no more than the traditional shoe box of unsorted papers, the requirement to keep digital records will be a massive shift. They will need help and support in understanding what they have to do and will be looking for advice on what APPs to use. I know that some firms are looking at developing their own APPs and others will be partnering with IT suppliers . Agents are going to have to get familiar with what is available in the market place because they are likely to have to use the same APPs themselves if they want to review their client's records – I will explore what that means later in this piece.
The second reason we are going to be busy is because during the transitional period we are going to be dealing with two different systems at the same time. Look at the example at 5.3 in the main document. This shows that the first quarterly updates for 2018/19 under the new system are going to be required before the 2017/18 SA return is due. Good luck in explaining that to your clients!
But let's look forward to the day when all of the transitional issues are sorted out and the new system is working smoothly (I'm not going to predict what that date might be, but I think that it will come eventually). What will accountants be doing?
Let's remind ourselves of how the system will work.Businesses will be reporting to HMRC on a quarterly basis. (The self-employed and partnerships from 2018 and companies from 2020). They will using digital tools to maintain their prime records and the consultation assumes that people will update their records in real time – scanning in receipts as they receive them (in the example at figure 3.1 Eve is so keen that she scans her receipts in at the checkout before she has even left the shop!). Items of income and expenditure will be then allocated within the software to specific categories. It looks as if HMRC will want all businesses to use a common set of expense categories, presumably because this makes it easier for them to spot trends and outliers by looking at consistent data across a large group of businesses together. So there should be a continuously up to date record of the business's transactions within the APP – "should" being the operative word.
At the end of each quarter the business will be required to update HMRC through the APP. (Business can choose to update more frequently, but I will ignore this for the moment). That updating will have to take place within 30 days of the quarter end. Will clients be happy to press the button and simply send the data? I doubt it. I strongly suspect that clients will want their agent to look over the data and correct errors and miss postings. That of course creates a number of problems. First of all how does the agent do this? After all what will he actually check the data against, given that all of the record keeping will already have been done in the APP. And secondly how does he do it? The suggestion in the consultation is that client will give the agent access to the APP (see 2.3). This has to be initiated by the taxpayer using an "invite accountant" option. Simply getting clients to remember to do this may not be as simple as it sounds… But once the agent has access he will be able to use the APP to make any adjustments which are required. Note that this is access to the taxpayer's software – it is not access to the taxpayer's HMRC account.
There is obviously a timing issue here. We are all familiar with the 31 January rush. This proposal may produce four such pinch points a year! It will depend on the clients' accounting years, but given that some dates, 31 March, 30 April, 30 September, 31 December, are more common that others it suggests that there will indeed be very significant peaks and troughs. What about the implications of this being done in the client's software. If you have a portfolio of clients all using different APPs then you and your staff may have to get used to a large number of different APPs. All of them are likely to do broadly the same thing, but they will all have their quirks: another reason to persuade clients all to use the same APPs. Indeed some firms already insist that client must use particular accounting software, and this trend can only continue.
Finally, perhaps closest to our collective hearts, is the question of who is going to pay for this. The consultation documents suggest that there will be savings to businesses as a result of MTD. Many people's instinctive reaction is that this cannot be right, particularly where clients want to continue to use an agent. Of course they may expect that we will do this additional work for free – we have all been there before. There may be some tough conversations ahead.
We'll come back to the content of the quarterly updates in a minute, but let's now look at closing off the year. In the consultation HMRC proposes that there should be a period of 9 months from the end of the accounting period to complete what is described as end- of year activity. This will include making any adjustments to the figures returned quarterly as well as submitting a declaration that the filing is correct and complete. My initial reaction is that that 9 month period is relatively generous given that the quarterly filings should have captured most of the information, but I am not about to suggest that it should be shortened! Clients being what they are it seems almost inevitable that many of them will leave completing their year -end activity until the deadline. Given that many self-employed business use a 31 March year end that does of course mean that the 9 month deadline for them will be the end of December! Make sure you enjoy this year's Christmas break: you may not get many more of them. 31 January is going to disappear as an important deadline for the vast majority of taxpayers as the annual tax return cycle is phased out, though it remains to be seen exactly how this will work, and it may remain an important date for a few more years yet.
So back to the quarterly updates. HMRC have confirmed that they are not going to require a full download of all transactions. They will instead require summary level information. It is not completely clear what that will mean, but it seems that clients will have to provide a breakdown of income and expenditure into the specified profit and loss account categories. There is an opportunity to input into the consultation here and I suggest that you look at this point in particular as the way in which this task ends up being defined will be critical to the way in which it will all work.
What is this end-of-year activity? It is clearly the desire of HMRC that it is reduced to the minimum and that the quarterly returns will contain all of the relevant information. This leads us to consider tax and accounting adjustments. The proposals to extend the cash basis, and the other simplifications which have been proposed, should reduce the need for end-of-year adjustments but they won't be eliminated completely. Take private use adjustments. HMRC's preferred approach is for such adjustments to be made in real time. So, if 25% is the appropriate adjustment for motoring expenses, 25% of all invoices coded in the software to motoring expenses would automatically be allocated to a disallowable category. So once the system has been set up with the appropriate percentage no end of year adjustment would be necessary. I'm not sure that it will be quite as simple as that in practice.
The consultation suggests that businesses will be encouraged to make tax and accounting adjustments in their quarterly reports but this will not be mandatory and they can be made instead as part of the year-end process. That does of course mean that any such adjustments will be much more visible to HMRC than they are at the moment because they will be able to compare the position at the end of quarter 4 with the final figures. That won't necessary be a problem, but it could be. At one extreme the client may, say, have forgotten to post one quarter's electricity bill: nobody is going to be worried if the agent includes a sensible estimate based on previous usage. But at the other extreme you can imagine cases where a whole lot of additional expenses appear "out of the blue" in the final reconciliation. Accountant may well feel very exposed if they are trying to fill in the gaps left by their clients' poor record keeping.
So where does this leave us? I'm not one of those people who are dead set against MTD. I think that the concept is right and that over time this will evolve into a system which will work effectively. Indeed I suspect that in X years' time we will look back and ask ourselves however we ever coped under the old system. But the critical question is what number do we put on X. HMRC's plans are that everything will be up and running across all of the taxes by the end of 2020-21. That still seems to be to be hugely optimistic. Leaving aside all of the issues about actually making the systems work and getting the necessary legal changes through parliament, MTD involves a complete rethink not only of the way in which businesses manage their tax affairs but also in the role of agents. I just don't believe that such a culture shift can be achieved within 4 years. I'm confident that good agents providing a good service to good clients will continue to be able to run profitable businesses – we've adapted to change before and will do in the future. But agents' businesses which are based on those shoe boxes and working late into the nights in January may need to rethink how resilient their business model will be in a few years.
MTD Is not set in stone and I genuinely believe that HMRC will listen to, and act on, sensible comments on the proposals as they currently stand. Do take the time to read the documents and respond, using the templates and other material provided by Rebecca Bennyworth on the Taxation Website if you wish. But be in no doubt. MTD in something like its current form is here to stay: a head in the sand approach could see your business fading away very quickly.
Former CIOT president, current editor in chief of Taxation and partner of RSM