Understanding how digital tax filing will impact the value of your practice

THE END OF YEAR work on tax returns has always been a trial and a struggle for most smaller sized practices.

A combination of penalties, and reluctant clients who feel that 29 January is ample time for their accountant to submit a tax return means there is usually a struggle with process/time management rather than any technical issues.

HMRC has, in its wisdom, planned to move self-assessment to a digital platform with opportunities for clients to check and submit their returns direct to HMRC. The digitalisation plans may or may not be achieved on time but an evaluation of the possible effect of the impact on clients and accounting practice revenues is not something to be dismissed lightly or even avoided.

HMRC will no doubt indicate to the individual taxpayer that it is providing cost-saving web-based and ‘simple’ procedures for the tax payer to submit their data and possibly avoid the costs of an annual accounting fee. I am sure the politicians will leap on this as the great benefit of the scheme in reducing ‘red tape’ and cost.

The reality of the situation is rather different. HMRC is intending to pre-populate as much of the information in straightforward tax returns as possible, so for the very simplest of tax returns there will merely be a need to check and possibly electronically sign the document before submitting it to HMRC.

Re-evaluating tax fees in a digital world

In light of this, and the digitisation of the process of tax filing, Foulger Underwood has recently had to rework our evaluation of tax fees.

On a recent sale of a practice a rather astute purchaser thought the longevity of simple tax fees in a vendor’s portfolio was going to be rather short-lived and the sustainability of that revenue stream from tax return fees was possibly going to be rather short.

We therefore developed an analysis model which identified tax returns into five categories, the analysis ranges from:

1.  Simple forms that will all be prepopulated

2.  Entries where there will be some input required from non-HMRC captured information

3.  Those with input from SME dividends or other non-earned income

4.  Multiple sources of income from non-captured sources including overseas dividends etc

5.  Non-resident or high net worth individuals

From this analysis it became clear that the simple tax returns, 1 and 2 above might be at risk from HMRCs digital initiative and possibly the workload in preparing tax returns for Category 2 would also be reduced.

Alongside this evaluation there was a need to:

1.  Take a view on the accuracy of HMRC pre-populated figures

2.  Assess the confidence level with the taxpayers’ who may wish to submit their signed document themselves without going through an intermediary

The factors we developed for these latter two issues reduced the risk factors which were inherent in the returns for simple and non-complex returns. Obviously the case for each practice is different, but we ended up with a discount factor based on the value of the total tax return fee income for this particular practice. The purchaser was reluctant to accept this evaluation but understood the methodology and in the end agreed it was reasonable risk evaluation, but to placate the purchaser the clawback period was extended by a further year.

This is an interesting example of one of the negotiation issues in selling and buying practices, but whereas in the past there has been a reasonable consistency in approach and methodology we now have increased audit thresholds and the digitalisation of self-assessment tax and quarterly SME reporting, where the values of these services, in terms of sustainable returns, need to be considered and re-evaluated.

I am sure this will not provide you with anything to worry about in the current filing season. You may be reassured that future January workloads will still be an intensive period for some practices, but clients will have an alternative, and will have to understand and be re-sold the benefits and value-add offered by the accounting practice intermediary.

Keith Underwood is UK managing director of professional services advisers Foulger Underwood

This is an edited and abridged version of an article that first appeared in Accountancy Magazine