• Benjamin Elliott

MTD's Impact On Record Keeping And Scope For Error



Evaluating MTD’s Impact On Record Keeping Behaviour And Scope For Error Among Small Businesses

With the implementation of Making Tax Digital for VAT (MTD), businesses have had to make certain changes to their financial record-keeping practices.


Depending on their existing bookkeeping processes, this was easier for some than others. The switch to the digital revolution was further hampered by resistance to letting go of established traditional financial record keeping.


Despite this resistance on the part of some, many businesses were keen to embrace this new way of managing their finances and taxes. But how effective has MTD been at reducing the margin of error in small businesses? And are there any other advantages to automation?


HMRC conducted a research study on MTD’s impact on record-keeping behaviour and its scope for error in 2019. In this article, we look at the key findings of this research. We also discuss what these findings mean for businesses today.

The Research Sample And Size

Fieldwork for this qualitative research study into record-keeping behaviour was conducted in October and November of 2019. The research consisted of 60 in-depth face-to-face interviews with representatives of small businesses that were mandated to join MTD for VAT.


The Aim Of This Study

This research study aimed to gauge the impact that the switch to MTD had on companies’ financial record keeping. HMRC aimed to understand if this reduced the risk of error in their record-keeping and tax return submissions.


To find out how MTD had affected the small businesses surveyed, they posed several questions:

  • How businesses are approaching their MTD for VAT obligations.

  • What the main differences are in their record-keeping practices compared to their pre-MTD methods?

  • If businesses realise that the data their VAT returns are based on is more accurate thanks to MTD.

  • To what degree do these record-keeping changes reduce the scope for error?

  • Whether businesses can identify which record-keeping changes caused these benefits.

  • If this reduction in record-keeping error can be linked to additional revenue.



The Findings

The participants in the study reported that their companies had, before MTD, relied heavily on manual input of data, physical records, and manual calculations. This was usually done at the end of the month or the end of the quarter, all at once. Not only was this behaviour very time-consuming, but it also allowed errors to creep in.


With the switch to MTD, there were 3 main ways in which these companies amended their financial record keeping. They were now either fully automated, partially automated, or using bridging software solely for MTD-compliant submissions to HMRC.


HMRC found that the scope for error was reduced in businesses that had switched to MTD-compliant record-keeping practices. Therefore, the possibility of MTD delivering additional revenue was high.


The least scope for error was found with companies that had made the transition to full automation for all their financial record keeping. This was because the errors that were caused by using paper bookkeeping methods, or a combination of manual and digital approaches, had fallen away.


How MTD Causes Businesses To Change Their Record Keeping Practices

These were identified as the main differences in businesses that switch to full automation. Even those research study participants who used partial automation were seeing the benefits of changing these practices:



Four Ways In Which These Changes Reduce The Scope For Error

These changes led to the following benefits for those surveyed. They are just as relevant for businesses today as they were at the time of this study.


There Is A Reduction Of Data Input Errors

With digital linking and automation, there is no longer the need for multiple data entries. It is entered once, in a digital format.


Businesses Enjoy Higher Accuracy In Tax Returns

Tax returns are subsequently more accurate. When financial data is fed into software daily, it is far easier to collate all records in a VAT return.


There Are Fewer Miscalculations

With calculations performed automatically via MTD-compliant software, the errors that resulted from manual calculations are no longer an issue.


It Is Easier To Spot Discrepancies

Data input that is constant, digital, in real-time and automatic bank reconciliation, leads to easier record keeping and financial management. Errors are not only reduced, but any that slip through are also easier to spot and rectify.


Why Do Businesses Choose Certain MTD Approaches?

What is the driving factor behind the decision to use a partial or fully automated approach to financial record keeping? This research study looked at the reasons why the participants had implemented MTD for VAT in their chosen methods.


The decision is largely influenced by capabilities, opportunities, and motivation. Let’s take a closer look at what these 3 factors mean.


Capabilities

Two factors were considered - bookkeeping skills and digital fluency. To be able to manage finances, keep records, and submit tax returns, one needs a certain level of accounting competency. With a shift to MTD, digital skills also come into play.


Older businesses are not always as tech-savvy and may require additional support and training to adjust to the digital approach. Those who lack this computer skill set, tend to resist switching to full automation.


Opportunities

When deciding on an approach to MTD, the availability of a digitally competent accountant is essential. The resources for additional software purchases and training, and the complexity of the business, should all be considered too.


Where the costs appeared to outweigh the benefits of MTD, companies often took the partially automated or bridging software approach. Even then, this would often be with great hesitance, and solely to avoid incurring a penalty for non-compliance.


Motivation

Confidence in technical capability, the availability of external support, and attitudes to digitisation were the biggest motivators when deciding on how to implement MTD.


Newer companies who had used full automated processes from the start would naturally be better equipped to use the digital MTD approach. Companies with a more modern outlook on digitisation and more digital skills were also more likely to adopt a fully automated approach to MTD.


External support was of great importance too. Not only support from HMRC, but also outside assistance, guidance and advice from the research participants' peers in the business community.



How Can Record Keeping Practices Benefit Businesses Today?

The benefits of digitisation and financial automation reach far beyond the realm of MTD for VAT. Those businesses that accept this, and are in step with the ever-evolving digital world, are seeing greater success as a result.


Record keeping can certainly be simplified when using automation, in order to get the most benefit you need to approach it in the right way. Not only will this benefit you in your commitment to MTD, but it will also streamline the operation of your business as a whole. The following points are essential:


Which Records Are Essential?

Find out which records you have to keep for using MTD. Many businesses are often unaware of what records are relevant, and this can lead to omitting important information needed by HMRC.


Whether your business is a sole proprietorship, partnership, or corporation, you will need to keep records of transactions of all kinds. As a rule, businesses need to keep documents about income from employment, savings investments and pension funds, business income and operating costs, and any rental income.


Communicate With The Relevant Personnel

Communicate your new record-keeping practices with staff. If you have a dedicated accounts department that handles your finances, make sure that everyone knows exactly what is expected.


Use The Right Software

Many businesses have fallen short in their MTD compliance due to using software that is not compatible with MTD, or by using it incorrectly. With the right financial automation, you will not need to bother with extra paperwork or manual calculations.


The key is to adequately educate your staff on MTD-compliant software. Some staff may be less digitally fluent, thus, this is something you need to identify and address to improve your automated record-keeping processes.


Provide the necessary training to get the most out of your accounting software, and it will benefit your long-term record-keeping.


Conclusion

Making Tax Digital for VAT was introduced chiefly to improve the way businesses interacted with HMRC when submitting their tax returns. The benefits such as reduced error, greater efficiency, higher productivity and even revenue increases soon became apparent.


While the switch to MTD was not without resistance and the inevitable teething troubles, all research conducted by HMRC to date supports the belief that MTD-compliant automation is a far more efficient way for businesses to handle their tax affairs.



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