Just what are the benefits of MTD?
by Rebecca Cave – Tax Writer
For years AccountingWEB members have been asking what the benefits of MTD actually are. Rebecca Cave says we have yet to receive a quantified response from HMRC.
In 2015 George Osborne thought that digitisation would bring an “end to the annual tax return”. This was fleshed out in a briefing paper titled: Making tax easier. Oh how we laughed!
Here we are in 2024, and the mandation of Making Tax Digital for income tax (MTD IT) is still over 18 months away for those individuals with turnover of £50,000 or more.
MTD for VAT was successfully introduced in 2019, with the smallest VAT-registered businesses finally being mandated into MTD for VAT in 2022.
Question time
In answering AccountingWEB members’ questions about MTD IT Craig Ogilvie, HMRC’s director of MTD, claimed that MTD for VAT “has been positively received by many. Around 67% of those users have already reported the potential for mistakes in their record-keeping has reduced since 2022”.
This statistic comes from research undertaken by IFF Research in 2020, who spoke to around 2000 randomly selected businesses that had already submitted a VAT return using MTD software, including using bridging software.
That research found that businesses that kept paper accounting records, or used only spreadsheets before MTD for VAT, were more likely to report that the costs of MTD outweighed the benefits. Businesses that already used fully compatible accounting software were more likely to report that the benefits of MTD outweighed the costs, and those benefits included time reduction for VAT submissions and confidence in getting the tax right.
Extra effort for MTD IT
MTD IT is a very different proposition to MTD for VAT. Accountants understand there is far more effort involved to transition unincorporated businesses, who currently report to HMRC just once a year, to quarterly reporting plus a tax finalisation process. VAT-registered businesses were comfortable with reporting at least quarterly to HMRC before MTD.
Accountants know that more effort equals more cost and hence higher accountancy fees for their clients under MTD IT. This was the crux of the question AccountingWEB members posed to Craig Ogilvie: “Will HMRC be explaining to clients what they will be getting in return for increased accountancy fees.”
HMRC’s idea of the benefits
To answer the members’ question Ogilvie made four claims of how MTD IT will deliver benefits for unincorporated businesses. Let’s examine each of his assertions.
- Reduce the chance of customers making errors, while supporting business productivity.
Ogilvie surely means the taxpaying business in his answer here, as errors made by the customers of the taxpayer are unlikely to be impacted by the business moving to MTD IT.
The claim that digitising accounting records reduces the incidence of errors in those records is frequently cited by software vendors. The underlying assumption is that the user of the accounting software is a competent operator who understands the accounting process, and using the software helps the business record transactions quickly and accurately.
The assertion that business productivity will improve by digitising the accounting records is based on the premise that less time will be devoted to accounting functions and correcting any errors. A productivity win would require the time saved in accounting processes to be worth more than the additional cost of the accounting software. Also, that using the accounting software would produce fewer rather than more errors. I’m sure seasoned accountants would agree that this is not necessarily the case.
- Ensure customers have up-to-date, accurate information to help with business planning.
This answer implies that before digitisation of the accounting records the business was not up to date or accurate – again a big assumption.
Ogilvie also asserts that the output from the accounting software helps the business owner to plan. I would argue that this only applies if the business owner understands the accounting reports and can interpret them to predict the future performance of the business.
- Move customers’ tax records onto one new system supporting wider improvements so HMRC can deliver a better customer experience.
This is a benefit for HMRC not for taxpayers. The promise of a “better customer experience” is not quantified and at best must be regarded as vapourware.
- Make sure customers pay the right amount of tax, so that more money can go to funding public services and supporting growth across the UK.
This is not a benefit for the taxpaying business, unless you interpret the avoidance of tax penalties for inaccuracies as a benefit. The new points-based penalty system to be introduced with MTD IT is likely to result in more penalties for tardy filers rather than fewer.
Expensive sledgehammer
Of the four benefits of MTD IT that Ogilvie cites, only the first two could generate financial savings for the taxpayer. However, those potential savings stem from the digitisation of the business’s accounting records, not from the process of reporting accounting results to HMRC under MTD IT.
It is arguable that the real purpose of MTD IT is to make businesses digitise their accounting functions. The threat is that the business will be in all sorts of trouble with HMRC if they fail to digitise as they won’t be able to submit their tax returns.
That’s one big expensive sledgehammer to crack a digital nut!
