HMRC’s much heralded Making Tax Digital (MTD), due to be brought in on 6th April 2018 has now been unveiled via a number of YouTube videos and a document published on their website titled ‘Making Tax Digital: Bringing business tax into the digital age’.
HMRC’s website document gives a number of case studies which by and large, are as much use as banging your head against a brick wall. Their relevance to the real world of small businesses, is at best tenuous and clearly demonstrates HMRC’s misguided belief that their theoretical examples actual reflect what happens in the real world.
This only goes to show that they’ve learned very little of how small businesses actually operate and the day to day pressures on the millions of one man or one woman business owners, trying hard to run their businesses and keep up to date with their record-keeping and the plethora of forms and returns required to be completed by HM Government.
If you’re interested in reading the full document (78 pages), please click
The YouTube videos are also of dubious assistance to those of you looking for helpful hands-on advice. If you go to the You Tube website and type ‘making tax digital’ into the search box, the first offering shows ‘John the plumber’.
In this video ‘John the plumber’ is shown using a smartphone app to photograph his invoices and expense receipts which are miraculously transformed via the iCloud, into quarterly MTD return which go seamlessly to HMRC.
So this got me thinking along the lines of If something appears too good to be true…..etcetera; so I decided to do some research and found an interesting recent article by Chris Mattos, editor-in-chief of Tax Adviser magazine,
Using the example of one of the case studies ‘Eve’, who’s circumstances were virtually identical to ‘John’ on the YouTube video, Chris Mattos conducted an experiment to test the time it takes to compile records using paper, a PC and via a smartphone app for (MTD) and this is what he found:
All about Eve
Eve used to keep her receipts and paperwork in a drawer, pulling it all out once a year when completing her return. It took a lot of time to find, sort, categorise and enter in one go, Eve had forgotten what some receipts were for, and was aware that some receipts for both income and expenses were either not kept or lost during the year.
In fairness to Eve, ask most small business owners about their finances close to the January filing deadline and your likely to see their eyes go blank immediately followed by a look of panic on their faces. Can you remember exactly what happened with a transaction that occurred over a year ago.?
Back to Eve. With the app on her smartphone, she is now able to capture her receipts closer to real time either at the checkout or when she gets back to her van. Most of the time she quickly photos her receipts when she gets them, capturing them within her software which stores an electronic image in the cloud storage.
Some stores that she uses to buy materials send her an electronic receipt, which she is quickly able to file in her software. When captured in her software, her app populates automatically with amounts recognised from each receipt. In these cases she is prompted to confirm that all amounts are business-related and for those that are, what expense categories they come under.
For those amounts not automatically recognised, for example because the printing is not clear or the receipt has been damaged, Eve can easily add any missing information in the app.
Here where the screams start. What of the practicalities? What about expenses that are part private and part business? Why are HMRC advocating a listing approach when double entry bookkeeping has worked for centuries? What about all the many other priorities on a small business owner has on their to-do list? Does this really save time? What if the technology isn’t up to it?
So looking at the situation from the perspective of the small businesses, Chris Mattos put together these three ingredients to test different tax-processing scenarios:
- A number of gap year students (with no experience of bookkeeping or tax) were recruited to play the part of ‘Eve the carpenter’
- A set of invoices and expense receipts for three businesses, already sorted into the proposed sections suggested by HMRC; and
- The tools to record the transactions – an old style paper cash book, a PC (with Excel and access to super-fast broadband) and an iPhone with a HMRC approved MTD app.
The MTD input experiment showed a considerable average difference in timings between the methods, notably that using an app to digitise the accompanying paperwork was on average 40% slower than recording just the transactions in Microsoft Excel and handwritten entries even outpaced the mobile app, by over 20%
High error rates were found in the auto-recognition function of the software used, as high as 50%, and there was a high need of a manual override to get the correct recording.
Using the app also resulted in a considerable number of discrepancies in the recording of expenses.
The main focus of this project was to assess the time taken to record the full account details. HMRC states that digitising should speed up the process and make it easier, but the results of the Tax Adviser test show that a digital record of the backing documentation can add to the time and costs to keep records as well as being prone to error.
In addition, the listing methodology takes away the ability for businesses to double check their figures, for example by carrying out bank reconciliations or checking on debtors and creditors.
As HMRC clearly view the use of smart apps as the way forward, how are they going to react to the likelihood of an error strewn tax return being sent in? As the taxpayer will have been following their advice and used their recommended smart app, will this mean that the taxpayer automatically qualifies for a ‘Reasonable Excuse’ get-out-of-jail card?
If you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.