Making Tax Digital for VAT: Treating Small Businesses Fairly Contents

Chapter 4: The new software market

43.This chapter considers developments in the software market in response to the latest MTD for VAT obligations on businesses. Challenges for business in selecting software providers are discussed in chapter 5.

Software industry

44.The accounting software industry, or at least its market leaders, see MTD for VAT in the context of their broader business of promoting and enabling business efficiency through the use of technology in a commercial environment. Sage cited its survey evidence of administrative savings by businesses moving from paper to digital accounting:

“Our research shows that by moving to digital accounting, businesses can save £17,000 per year, the equivalent to getting 27.6 days a year back to focus on revenue-generating activities.”27

45.Mike Cherry, National Chairman of the Federation of Small Businesses, was not sure his members would agree:

“For those small businesses, many of which are microbusinesses, that are just about able to comply with the VAT regime, which is one of the most costly tax regimes that they have to deal with, this [MTD] is going to take a huge amount of their time away from coping with all the additional problems that they are facing at the moment relating to costs, Brexit and everything else. That seems quite bizarre.”28

Our witnesses supported using digitalisation and technology to promote efficiency and productivity.29 How and when it was best achieved was the challenge the Government had not addressed in its enthusiasm to mandate MTD for VAT.30

46.The accounting software industry has a pivotal role in MTD for VAT in supplying systems to support taxpayer compliance and expects to be a major beneficiary of it. The industry has had to adapt from the wider version of MTD originally envisaged to the narrower version for VAT, including bridging software to accommodate the use of spreadsheets. It has invested in developing its software through the VAT pilot as well as raising business awareness.

47.In the longer term, MTD for VAT is still expected to extend to income tax and corporation tax. To sustain product demand and development, the software industry has asked for clarity on the long-term road map. Although digital record-keeping may be suitable for all taxes, systems will have to work for multiple taxes and suitable lead time is required. Sion Lewis, chief executive officer of IRIS Accountancy Solutions, said:

“… clearly there is concern about not having access to the longer-term plans for MTD, and it would be incredibly helpful to understand those plans”.31

Development of MTD-compliant software

48.The software market for MTD for VAT compliance falls into three broad categories: the latest versions of comprehensive accounting and tax reporting packages (possibly cloud based); older software licences, sometimes industry-specific; and newly developed ‘bridging software’, to enable spreadsheets to make the digital links to HMRC systems.

49.The larger software providers appear to be confident that the latest versions of their software packages will be ready for the MTD for VAT start date, or are already tested and ready.32

50.It is not clear whether or how older products will be made ready for MTD for VAT: one provider is offering an MTD for VAT module to add to older products for the first year of mandation, acknowledging that the timescale for business to migrate to new technology may be too short for some.33 Witnesses told us that older packages with a one-off licence fee would have to be upgraded to the latest version on a subscription package.34

51.HMRC said that specialist sector software, for the agricultural industry or for charities for example, was under development.35 There is, however, no certainty if or when fully developed software for these will be available.

52.The position on bridging software to enable spreadsheet use, particularly by unsophisticated taxpayers and smaller businesses, is not clear. Products are listed on HMRC’s website though unhelpfully they are not labelled as bridging software products. It is also not clear whether the software companies will back the products with education and training support and we note that the continued use of spreadsheets as the main mechanism for MTD compliance runs counter to the leading software providers’ main fully digital market offerings.

53.Witnesses referred to HMRC’s decision that ‘cut and paste’ solutions would not meet MTD for VAT requirements. Some disagreed with HMRC’s conclusion that such approaches did not constitute a digital bridge rather than a manual intervention of the type HMRC is trying to remove as a potential source of errors.36

54.Many larger businesses have bespoke software for their accounting; this software will have to be reviewed individually to assess MTD compliance. Although HMRC was confident that larger businesses would find it relatively easy to meet MTD for VAT obligations, our evidence challenges this. UK Finance said the obligations set out in VAT Notice 700/22, issued in July 2018, failed to consider adequately how VAT applied to financial services businesses and how its requirements could be applied by those using certain partial exemption methodologies. They said, “this is significantly more than our members are currently required to record and will result in additional costs and complexity”.37 UK Finance stated that considerations of cybersecurity, internal compliance, due-diligence and the internal technological requirements, translated into “a time-consuming and costly exercise”.38 The CBI echoed those concerns.39

55.New software packages need to be accompanied by training and support. They are best introduced by businesses at the end of an accounting period. Concern has been expressed that training and support may not be available and that businesses will be pushed to change at inappropriate times in the rush to the April 2019 deadline.40

56.The software industry is, unsurprisingly, responding to the commercial opportunity of Making Tax Digital for VAT. We have seen no evidence that any free software products will be offered.

57.We question the logic of requiring taxpayers to spend additional money to pay their tax. Since a free option has not emerged from the software industry, the Government should consider again the case for providing a basic, free software option.

58.Businesses and accountants using the latest versions of mainstream digital accounting software are likely to be well supported for Making Tax Digital for VAT compliance in April 2019. It is not clear that older packages or specialist software will be updated to be compliant with Making Tax Digital for VAT in time for April 2019.

59.A market in ‘bridging software’ does not seem to have emerged. As there is a greater commercial opportunity for software providers in those businesses who are digitising more substantially, ‘bridging’ customers may be less supported by the larger software providers, and so receive less training and support.

60.Many of the concerns about the software required for Making Tax Digital could be explored and overcome with a longer pilot period. This ought to allow a more developed software market to emerge in 2019. In this context, HMRC’s ‘soft landing’ for digital links is essential.

27 Supplementary written evidence from Sage (DFC0088)

28 Q 17 (Mike Cherry)

29 See Q 15 (John Cullinane), written evidence from ICAEW (DFC0073) and ICAS (DFC0076)

30 See written evidence from Association of Accounting Technicians (DFC0044), ICAEW (DFC0073), Kevin Ringer (DFC0064)

31 Q 24 (Sion Lewis)

32 For example, see supplementary written evidence from Sage (DFC0088).

33 Supplementary written evidence from Sage (DFC0088)

34 Written evidence from ICAEW (DFC0073), Harrison Riley Accountants (DFC0016), Christopher Prescott (DFC0055) and Kevin Ringer (DFC0064)

35 Written evidence from HMRC (DFC0085)

36 For example, written evidence from Sheena Green (DFC0009).

37 Written evidence from UK Finance (DFC0066)

38 Written evidence from UK Finance (DFC0066)

39 Written evidence from CBI (DFC0079)

40 Written evidence from P McKelvey & Co (DFC0003) and Richard Pepper (DFC0034)

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