The importance of making tax digital

Prince Charles believes accountants are “key to saving the world”, former accountant and Conservative MP Luke Graham told a dozen MPs in a Commons debate late on 30 October, shortly before parliament was dissolved for the General Election.

The Prince’s Accounting for Sustainability Project (A4S) is “dedicated to using accountants to try to help to solve social and environmental issues”, Graham explained. Its stated aim is to “make sustainable decision making business as usual”.

Advanced accounting systems – and the Making Tax Digital (MTD) project in particular – make businesses more productive and can lead to better decision-making, he said, adding that such systems are also environmentally friendly because “we are able to move away from paper receipts and invoices and towards electronic records”.

Graham argued that the whole country will benefit from MTD because interactions between companies and their customers and suppliers will be easier and more effective.

“Not only will companies grow, but [MTD] will contribute to our productivity and thus our GDP,” he said.

Mandatory digital record keeping for VAT, along with a requirement to file VAT returns using MTD-compatible software, came into force in April 2019 for businesses over the VAT threshold – see HMRC’s VAT notice 700/22. But the government had announced in March 2019 that it would not be mandating MTD “for any new taxes or businesses in 2020”.

Graham said he was “greatly upset” by the delay in implementation of MTD for income tax, which will require digital record keeping and the submitting regular updates to HMRC.

Responding for the government, financial secretary to the Treasury Jesse Norman said MTD for VAT was proving to be a success for HMRC but the wider benefits were also becoming clear.

“Potentially quite significant” productivity benefits were starting to become “sufficiently well known within the smaller business community to result in many signing up for MTD for VAT voluntarily”.

Inderveer Tatla, general manager at Capium, noted that the first major step for digital taxation has enabled “a wave of businesses to adopt and embrace” a new way of working.

“But until the other MTD agendas kick in, practice owners and SMEs will struggle to appreciate the true commercial benefit of implementing best practice technology,” she told Financial Accountant.

“All this delay does is kick the can down the road, and take the momentum out of getting SMEs and clients to get their data in order. Practice owners need to lean in and continue to get their clients to think ahead so they can streamline their own practice processes, review their profitability and remove the reliance on them as practice owners. This is key, especially where the practising accountant is looking forward to succession planning,” she added. 

Misplaced fear

Sue Christensen, a Cheshire-based IFA fellow, was happy to report that her dread of MTD for VAT was misplaced.

“We had persuaded the VAT-registered clients to start using a QuickBooks cloud-based system and this served them and us very well,” she said.

“But there’s always that one big job to go wrong, and this surfaced in a really time-consuming way, with a large client closing his sole trade activities and registering a newco in late March 2019. The new VAT registration took for ever. Eventually the verification code for MTD did arrive after three attempts – then we tried to submit the return, only to discover that the ‘computer’ had changed the VAT return dates because of the delays,” she added.

Christensen echoed Tatla’s concern regarding the delayed rollout.

“I was able to make use of the imminent introduction of MTD to persuade clients to get more up to date and adopt a software system, and the delay has set this back,” she said. “They now see little need and so are as late as ever with their books. A definitive date [for implementation] is a must.”

She suggested introducing MTD for income tax for VAT-registered businesses in 2021, and for others (with turnover at least as high as the income tax personal allowance) in 2022. 

Christensen was sceptical about HMRC’s view that MTD will reduce the tax unpaid because of avoidable errors and help to close the tax gap. Tax advisers have pointed out that businesses within MTD are less likely to overlook expenses. There will still be scope for error such as incorrect VAT treatment of expenses.  

The Scottish National Party’s election manifesto suggested an inquiry to “uncover the reasons for [MTD] delays that mean we still do not have the 21st century tax payments system that could help tackle avoidance and evasion”.

In contrast, Labour said that it would not introduce mandatory quarterly reporting for businesses under the VAT threshold, suggesting that it would be an unnecessary administrative burden. The new government may be well advised to “get MTD done”. 

Andrew Goodall is a freelance tax writer and journalist