Making Tax Digital – is this the end of spreadsheets or not?
EDIT 8th March 2019: DataDear has now launched a free bridging tool for Excel and with the right mapping to properly maintained spreadsheets, this can still be considered as a digital link.
The hype around the HMRC’s Making Tax Digital (MTD) is understandable, considering the impact this will have on several small businesses and firms specialised in helping small businesses and sole traders. By now, UK-based accountants are aware of the MTD plans – or at least they should be – yet an immediate solution to the problem is not so obvious. More importantly, will this mean the end of spreadsheets including Microsoft Excel?
Explaining the MTD in short is a challenge so best to start with the 6 consultation documents, each focusing on specific customer groups or specific elements of the MTD reforms which were launched in August 2016. The detailed outcome of the consultations was published at the end of January. Read more about these documents.
How will this affect the use of spreadsheets?
Initially, the drive from various stakeholders to completely remove spreadsheets seemed to be the prevailing way forward. Let’s face it, spreadsheets are the accountant’s best friend, yet they are, at times, used or abused on how they are applied for accounting purposes. Yet paradoxically, we are also aware that if used properly, the spreadsheet can be an extremely flexible and efficient tool.
The most relevant consultation document on this topic which I have found is the Bringing business tax into the digital age. Luckily, for those who would like to stay within familiar territory, this document states that “businesses will be able to continue to use spreadsheets for record keeping, but they must ensure that their spreadsheet meets the necessary requirements of Making Tax Digital for Business – this is likely to involve combining the spreadsheet with software”.
Accounting software providers are certainly impacted by this decision for obvious reasons. The need to move to dedicated software is still an option but not a mandatory one. Let’s slice and analyse this decision in some more depth. Using “spreadsheets for record keeping will be allowed” – perfect! One would then need to properly assess what is meant by “meets the necessary requirements” – we will probably have to wait for further guidance on this point. The last part which states the need to “combine the spreadsheet with software” is rather interesting and might refer to 3 possibilities:
- Continue using your spreadsheet and then find an integration tool (there are already a few available on the market such as DataDear which connects with Xero and will soon integrate with Quickbooks) which can easily push the required data from the spreadsheet into a cloud-based accounting software such as Xero or Intuit Quickbooks – these applications will naturally build direct links to the HMRC’s api. The accountant would then need to login into the accounting software and initiate the update to the HMRC. A clean solution but perhaps can be an overkill in some cases.
- Enhance the spreadsheet to push the required data directly into the HMRC’s api without the need to integrate with any external accounting software. Let’s remember that businesses eligible to use ‘three line accounts’ will be able to submit a quarterly update with only three lines of data (income, expenses and profit). It should not be too complex a task for software similar to the DataDear add-in to build something which would allow a direct integration to HMRC’s api. One would then need to evaluate if this is a suitable option for the larger businesses.
- The HMRC can and probably will provide free online software to businesses, especially to those with the most straightforward affairs – this was a key decision from the consultation however one would need to understand how this will be put into practice. Moreover, not every business would qualify to use such as system.
The Finance Bill legislation
The secondary legislation of the Finance Bill 2017, published on the 20th March 2017, provides more details on the periodic updates expected from businesses. The regulations state that all businesses (including sole traders) will be required to provide HMRC with specified information every 3 months. For most businesses there will be 4 updates (periodic reporting) for a year. Some form of software automation / assistance to prepare for these updates would be ideal, especially for firms which need to carry out this task for a number of clients.
Most of the information required will consist of summary totals for each category. Businesses eligible to submit ‘3 line accounts’ (as defined in notices published by HMRC) will be able to submit total figures of their incomes and expenses.
More updates on this topic will be provided as things develop. What we do know for sure is that spreadsheets are here to stay for the foreseeable and software will continue to evolve to ensure you can keep using your beloved Excel!