HMRC today published its consultation response and announced that it is adapting its approach to taking the UK’s tax system into the digital age. As much as we support the overarching vision of the Making Tax Digital policy, it was inevitable that we would see some form of reshaping given the sheer scale, complexity and ambition of the project.
Making Tax Digital is an ambitious digital initiative which begins by providing every UK taxpayer with an online digital tax account and replacing the annual self-assessment tax return process with a new quarterly online update.
One of the most challenging parts of HMRC’s original plan was how they’ll tackle the problem of digitising the financial affairs of millions of small self-employed, sole trader and partnership businesses. From a software product marketer’s perspective this cohort is particularly problematic since most of these entities don’t habitually use accounting software or bookkeeping software, nor do many of them typically employ the services of external accountants or bookkeepers who often guide and facilitate the adoption of accounting software among small businesses as part of their advisory role.
HMRC had banked on the emergence of a new commercial market for low cost or free software tools in time for the April 2018 launch to address this segment but in my view this was always something of an ambitious planning assumption and today’s reversal on the acceptability of using spreadsheets for capturing information is sensible.
Adoption inertia among millions of micro entities
Rough market estimates suggest that of the UK’s total of five and a half million businesses, there are at least 3 million sole traders and partnerships who lie beneath the VAT threshold, and many of these micro entities don’t employ the services of a bookkeeper or accountant and therefore are not represented by an ‘Agent’ in the HMRC context.
HMRC has rightly placed emphasis on minimising the burden of change placed upon those such businesses by MTD which at least equates to expecting software providers to offer free or ultra-low cost MTD ready software tools.
In addition to the prospect of limited scope for revenue or monetisation, software vendors will be required to invest money to both market to and to encourage these micro entities to discover and adopt their new MTD products, since being listed on an HMRC directory of MTD ready products won’t alone drive sufficient awareness nor adoption momentum.
Coupled with the need to also provide an ongoing service and support provision to these clients will result in more cost being borne by the software provider who may be forced to seek alternate monetisation routes such as selling on personal data to third parties or by cutting costs to the bare minimum in areas like quality of service or ensuring customer data stored safely and securely.
None of which makes for a very compelling market opportunity for software vendors to rush to satisfy, or at least satisfy in a way that both supports the HMRC’s objectives without potentially compromising sole traders by forcing them to choose from a number of poor or compromised products.
Structural market issues can’t be ignored
The old distribution economics, high cost and inherent complexity of the last generation of desktop accounting software largely prevented it from addressing the needs of this category, hence the most popular accounting software platform in the UK over the last thirty years is Microsoft Excel.
It follows that if the UK’s micro entities have long eschewed accounting software for very good reasons, then effecting behavioral change among this community will not be trivial and it will take time to prove and establish such a large change, and other methods should therefore be considered.
Cloud technology certainly addresses a portion of the cost of distribution element of this problem, but it doesn’t naturally follow that all the other points of inertia can be overcome profitably by the software industry without more time, effort and collaboration between the accounting software community, accountants, bookkeepers and HMRC.
Make no mistake, the world is going digital and that simply must include the operations of state as well as commerce. This is not an optional endeavour.
However in my view, in order for this vision to be fully realised HMRC needs to better harness the best product marketing brains the software industry can field in conjunction with the accounting and bookkeeping industries to arrive at a roadmap where every stakeholder; government, accounting professionals, technology providers but, principally, UK businesses can all sign off on something that will deliver for digital progress for ALL stakeholders, not just HMRC.
Today’s consultation response from HMRC is a positive step.
The UK can and must realise its digital future and as passionate advocates for a digital future we recognise that Xero has a role to play and we’re committed to do so in any way we can.