The stakeholders with an interest in how MTD works out are taxpayers, the HMRC, and society in general.

The Good

Embracing MTD will help taxpayers better manage their tax affairs.

The first benefit is it will force them to regularise the way they set about recording their income and expenditure as we help them prepare and submit the detailed transactional records the HMRC require every quarter. A stitch in time does save nine, and is far easier to compile the records you need when you have the information to hand, instead of wasting time later trying to remember where you put the required paperwork.

Secondly, it increases the chances of taxpayers recording the incidental claimable expenditure that can be all too easily forgotten about and lost with time. We have noticed our new clients are often shocked at how much tax they can save by just being more meticulous about recording the costs they incur on a day-to-day basis.

Thirdly, MTD will keep the taxpayer informed of the likely tax bill they will have to settle every July and January. Knowing what tax they are likely to have to pay based on the reported income and expenditure they have incurred to date, allows more time to ensure they are in funds to settle the tax liability when it falls due.

It may not seem a benefit at the time, but part of our role as your accountant is to guide you on what you can and cannot claim as allowable expenditure against your taxable income. For example, while we would agree many a business deal has been struck on the golf course, unfortunately the HMRC will not accept club memberships and green fees, to say nothing of the 19th hole entertaining as an allowable deduction against taxable income. Keeping our clients tax compliant so they don't invite the HMRC to open a tax inquiry is one of primary objectives.

MTD will transform the HMRC into a better public service.

The HMRC has not been operating as an effective public services for decades. The problems they faced can be summed up when the HMRC felt the need to publish how many weeks taxpayers could expect to wait, before their mail would be opened and read, let alone processed for action. The delays and sense you could never reach a person of authority that could help answer you query served no person's best interest.

Although one cannot help feeling MTD has been launched with crossed fingers it will actually work as intended, there is no denying the technology that has been put into place to automatically process and check the millions of tax returns they receive each year, has the potential to free up their staff to once again be available to talk to taxpayers to deal with their inquiries.

Societal Benefits.

It is ultimately the taxpayer who has to foot the bill for the public services we all enjoy in the UK. There is no question that the majority of honest taxpayers pay substantially more tax to subsidise the billions of pounds that are not collected by tax evasion of those working in the grey-employment sector. MTD will quickly make it harder for people to evade paying the tax they should.

The bad

There is an often unspoken catch to MTD.

Consider this hypothetical situation. You have made a good living for years as a sole-trader supplying your services to a trusted client where the fee you are happy to receive is based upon your understanding of the margins your client enjoys with their clients. It seems a fair and equitable working relation … until one day you discover that your client has been deliberately misleading you and making far more money out of your services than you realised. How would you feel about the working relationship now? What would you do about it?

Now consider the same situation, except we substitute you for the HMRC who is dealing with a dishonest taxpayer?

Complying with MTD makes it harder for taxpayers to hide and under-report income received, and far harder to overstate deductible expenditure. This will mean a significant number of taxpayers may end up being forced to declare far more taxable income under MTD than in previous years.

The technology the HMRC has used for years already identifies when a individual taxpayer's reported taxable income strays outside the expected range for their profession in the location they operate. It is this kind of variance analysis that is used by HMRC to identify who should be investigated each year. The use of AI will only enhance and perhaps even automate the initial opening of an HMRC inquiries to a targeted cohort of taxpayers that the HMRC know are not complying with the rules.

Keep in mind that the HMRC can raise back-duty assessments going back for up to six years, before you even consider the penalties and late payment interest they can add to the final cost of closing a tax investigation.

There might be perfectly acceptable reasons why your taxable income may vary from year to year, in which case the taxpayer has nothing to worry about.

On the other hand, if a taxpayer has deliberately understated their taxable income and anticipate reporting under MTD has the potential to invite an HMRC investigation, then there is a strong argument for making a voluntary disclosure to the HMRC to reduce the size of the penalty they will suffer.

The Ugly

MTD requires taxpayers to deliver transactional reports every quarter, which will quickly build a huge national database of data about who is doing business with who. It is beyond human abilities to discern patterns and inconsistencies in that growing store of data, but AI technology will not have the same limitation.

Money laundering of proceeds from crime involves huge sums of money, and the problem the authorities charged with closing down these illegal activities experience is they often cannot see the wood for trees. MTD and AI has the potential to be a game-changer for law enforcement because it will make it easier to trace how crime proceeds are being laundered through legitimate businesses, whether the latter know it or not.

That puts every business owner on notice to think twice about entering into any obvious dodgy deals, especially if it involves payments in cash, or comes with a request to lose the transaction in the books. There is now a higher obligation to look at every business transaction one undertakes to consider if it a legitimate one, and how it will be viewed by us first, as your reporting accountants under MTD, and then the enforcement authorities when you make you make your MTD reports. It is essential for all business owners and landlords to understand how easy for a trained human eye to spot suspicious transactions when reviewing sets of accounting records. The computerised systems already exist that can review accounting records in seconds and start alerting enforcement officers to what needs further investigation. As they say … watch this space.