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Making Tax Digital and Plain-Text Accounting

30 July 2022 (3 minute read)

🏷️ opinion 🏷️ technology 🏷️ finance

HMRC’s Making Tax Digital

Making Tax Digital (MTD) is part of the UK Government’s plan for modernising the tax system for both businesses and individuals.

For years, HMRC (the Government’s tax department) has had an online tax system that is infamously complicated and slow to use and update such that even accomplishing simple tasks can be long and painful processes. Part of this is due to the laughably complicated UK tax system itself (rather than the fault of the technology), but some of it can certainly be attributed to the antiquated tooling.

The main idea behind MTD is that tax-payers make use of accounting software - such as Xero or Quickbooks - to automate their tax returns. These commercial systems are often more nicely-designed and well-maintained than HMRC’s own, and so it does make sense to use them if you are looking for a more pain-free tax experience.

The positive effect of using such a tool is also amplified if you already use one of these systems for your bookkeeping anyway. In these cases, the accounting system is naturally aware of all your transactions and tax liabilities, such that submitting returns via MTD can be as simple as a couple of button clicks.

If you’re not currently using this types of software for bookkeeping (for example, if you’re a smaller business just using some simple spreadsheets), then you’ll have to change your business processes. And since the MTD-compatible tools mostly seem to be commercial SaaS systems, this will likely come at an additional cost.

The impact on plain-text accounting

Those people that follow this blog will know I’m an advocate for the simplicity, flexibility, and transparency provided by plain-text accounting systems - in particular, those compatible with Ledger and its peers.

MTD-compatible software must be approved by HMRC, which results in a walled garden and restricts people’s freedom. I don’t know what the approval process involves, but I would imagine successful systems would include some form of integration secret or private authentication mechanism with HMRC. Such arrangements don’t lend themselves well to distributing FOSS or self-managed tools since they would depend on the end-user managing the secrets themselves.

As such, I fear that the introduction of MTD will rule-out a swathe of plain-text methods and open-source tools for those doing their accounting and bookkeeping in the UK. Sure, one can use Ledger to periodically export CSV data and import this into an “approved” system for completing a tax return, but do people really have time for this? And why should they continue to use the non-approved methods when they already have to pay for the MTD-compatible ones?

I am fully on-board with modernising the tax system, but I feel that if this was instead achieved through providing open APIs (authenticated with OAuth2 or similar and without the requirement for app-wide secrets), then it would enable the open-source community to develop systems and tools to compete with the commercial offerings and help to keep things fair for everyone. Governments mandating the use of specific for-profit companies for non-optional activities just doesn’t feel right. Many people in the UK are still wary of this after the Government approach to the COVID pandemic, with dubious contract awards for PPE and testing.

Making Tax Digital is still relatively young. In fact, as far as I know, it’s only currently mandatory in some sitations relating to VAT for businesses. However, there is an objective to gradually roll it out more comprehensively for business and individual tax over the coming years, and I really hope that the HMRC APIs can be developed in a fair and non-exclusive way.

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