Chatter about Making Tax Digital is picking up, but this is a situation where allowing compliance to drive change might put you behind the curve, rather than in front, notes Kevin Reed.
The trundling (some may say stumbling) juggernaut that is Making Tax Digital saw some new information come to light in the last few days… but whether the pace (or) direction of its delivery has changed is very questionable.
First-off, the most-publicised titbits came via a new policy document from HMRC. The tax authority set out some more detail about MTD’s introduction for sole traders and landlords in the income bracket of £30k to £50k (from April 2027).
While more of a summary of recent thinking and announcements, what did catch the eye was the whooping £561m transitional cost of moving to MTD for this tranche of micro businesses; with an ongoing annual cost of £196m a year. And between 2027 and 2029, the increased tax take from digitising these businesses’ records will equate to around £1.3bn.
Talking tax
Just a few days’ earlier Intuit held a very interesting webinar with HMRC director general of customer strategy & tax design Jonathan Athow, which hasn’t received the same level of interest. The webinar (or ‘fireside chat’ as it was badged) aimed to discuss HMRC’s modernisation plans; MTD; and ‘putting the customer at the heart of HMRC’s agenda’.
Did Athow throw any metaphorical grenades out there? Within a well-managed webinar (‘fireside chat’) that was unlikely. But it was interesting to hear him say the quicker information is received then the more accurate it’s likely to be… that may seem counterintuitive but makes more sense within the context of digital transactions flowing in real-time into accounting/tax records. And digital transactions are more likely to have a level of automation (and less chance of humans getting things wrong).
Athow then said that this change would lead to “more timely payments”. This was a bit of an eyebrow raiser as it could be taken as ‘payments closer to the time of transaction’. That doesn’t have to mean quarterly – though we all suspect that’s a goal for the medium-term. In fairness, paying tax in January that occurred months and months before is a strange one (I whispered that in my head as I wrote it).
Digital communication
Further digitisation is to follow, Athow added. Again, a bit of a no-brainer but you do wonder how this would work in an increasingly complex tax environment. Perhaps AI will be the layer of computational excellence that helps taxpayers get to the answers they want? Of course, this may put tax advisers’ role at risk, which made me think mischievously about an arms race between HMRC’s AI and that of the accountants themselves.
Perhaps, even more surreally, we can have tax disputes communicated between the adviser and tax authority with their respective AIs chuntering to each other? Who knows, they might even fall in love – though one suspects the adviser’s AI will get frustrated at HMRC’s tardiness at replying to (digital) letters.
While Athow (thankfully) didn’t explicitly go down the direction of AI, he did say that MTD was “exciting” because of the potential to use third-party data to help pre-populate tax forms – however, that will need to be managed very carefully. An alternative would be to use that data to help ‘nudge’ someone filling in a form to double-check the answer they’ve given i.e. ‘are you certain that’s right?’
Performance anxiety
Athow also addressed the elephant in the room: HMRC service standards are not being met. While “hotspots” such as VAT registration have been targeted, it’s all in the context of growing tax complexity, and a resource-constrained department.
Digitisation, particularly where it can support people to self-serve, will help – but that requires investment and Athow notes that decades-old legislation can “constrain” modernisation.
He also notes that the stars must align somewhat for this to all work, namely: HMRC; the taxpayers; the software industry; and the accountancy/tax profession. “It’s a challenging delivery but we’re doubling down on efforts to get to April 2026 (for qualifying income over £50,000).”
The upshot
One can’t help thinking we’ve been here before (we have). Admitting that the latest MTD deadlines are “a challenge” and that “we want to work with all partners on this to make sure we’re aligned” doesn’t build a system that can handle millions of quarterly submissions. It hasn’t built one before.
However, the direction of travel is set. It is an inevitability that, at some point down the line, we will end up with a PAYE-style self-assessment system – or even real-time tax. It’s a question of when, not if. MTD is step down that path… albeit a tentative step we’ve been waiting for a while.
Yet the ‘when’ is not to be underplayed. In these circumstances, it could make a huge difference in terms of software companies’ focus, or even the efforts that a practitioner makes in pushing their clients down the route of digitisation.
It is, after all, a sad inevitability that regulation and compliance drive technological and operational change in business, rather than those changes initially made to produce meaningful insight to increase profits, or be more efficient.
Market forces
The irony is that, despite the excruciating wait for MTD, many practices have grasped the nettle and pushed their clients down various technological and digital pathways. The ease with which new practices can set up using a basic app stack has seen many formed in recent years, alongside a plethora of mergers and consolidations in the accountancy market that has seen a steady flow of accountants and tax advisers then leave to control their own destiny.
The likes of Advancetrack have supported new and existing practices to improve processes and support resource, particularly as the pandemic drove home to accountants’ clients their need for help beyond compliance.
Perhaps then, after all, it will be the market that drives the digital, automated and intelligent back-office, rather than the government’s desire to close the tax gap. Much better this way around than explaining to clients that their tech costs are to increase and, perhaps, their tax bill too.
Kevin Reed is a freelance journalist and editor of Financial Accountant magazine.
