Monday 20th January, 2020

Making Tax Digital is forcing firms to review their outdated legal IT systems

Making Tax Digital

The first year of Making Tax Digital (MTD) for VAT, known as the soft landing period, ends this April.

The first year of Making Tax Digital (MTD) for VAT, known as the soft landing period, ends this April. During these first 12 months, VAT-registered firms used to keying in their quarterly return have been required to install suitable software that records all VAT transactions and then submits the data to the HMRC via an Application Programming Interface (API). For firms without a compliant legal accounts package or which use Excel to record their accounts, bridging software has existed to meet the electronic VAT filing requirements.

There will be firms choosing to use the bridging software option to help get them through this first year. However, as the name suggests, soft landing was only meant to be a temporary measure. It does not deal with other key elements of MTD compliance such as digital record keeping.

In this first year of MTD there have been no penalties for non-compliance. After April, while the Government prefers a ‘light touch’ approach, firms can face a financial penalty if HMRC considers a practice has not been making enough of an effort to comply with MTD.

What does this mean for law firms?

The reality is that those firms who are operating the oldest systems are most likely to be at risk. Without MTD compliant software the likelihood of financial penalties is higher.

It makes no commercial sense for a developer to pour resources into old and redundant software bringing it up to date. It’s like polishing a Ford Escort and believing if you buff it well enough it will be like a new car. Just because the legal IT system has worked well in a practice for many years, should not mean it is ‘fit for purpose’ in today’s business environment.

Software suppliers are ploughing development resources into their current platforms making them relevant and easy-to-use in today’s world – and that includes in relation to MTD.

The end of the soft landing period in April may act as a necessary ‘trigger’ for firms with legacy (old) systems to consider their next step. Clearly, a developer would prefer to migrate all its legacy customers to its current platform. That makes sense for them, not least from a consistency of support point of view.

A software company is likely to approach its customers that have legacy systems, with an attractive package (possibly time-limited) to encourage a move to MTD-compliant software. But is that always in the best interests of the firm? Moving to a “go-forward” product is not like a mobile phone upgrade. There may be a gap of 15 years between IT systems and zero commonality between the legacy and successor solution. Logic and business sense should mean that a law firm is advised to look at the whole of market for its next legal IT system, and not take the word of its existing supplier as ‘gospel’.

What should law firms invited by their supplier to upgrade do?

A firm in possession of an invitation to upgrade to a successor system from its existing supplier because the current software is not MTD-compliant, should consider.

The time needed to plan for a new system

The average time from old system to new is 3-6 months. Doing nothing is now not an option. You may want to refer to a previous white paper we have written; Insight Legal – White Paper – Choosing the right legal software – Dec 19 

What’s on offer from the existing supplier?

Ask for a detailed proposal from the supplier of exactly what their deal is for your practice to migrate to its current platform. What are the costs, is any ‘special offer’ time limited and what are the implications if you choose not to take the offer up? Does any new agreement tie you in for a fixed term or is the new software being offered to you as a subscription service?

Discuss and agree internally what your firm needs from any new IT software

Understand what your practice really wants an IT system to deliver. Case management, practice management and accounts software – all, or a combination of the three? Don’t assume your existing supplier knows better than you what’s right for your firm. There’s little point paying for great functionality that won’t be used.

Which other suppliers offer a migration path from your existing system?

Research other suppliers on the market (Google: Legal IT Suppliers) and find out more about those with a good track record of migrating from your current system to theirs. With many years of historical accumulated data, live matters and finance records, it’s inconceivable to accept a situation where data must be re-entered manually in exchange for successful migration. This area can be a minefield for firms, and not every supplier is equally co-operative once they have resigned themselves to losing a customer. Our briefing note called ‘Is your Legal Data Being Held to Ransom?’ provides helpful guidance on the subject of migrating to a new system.

You are entitled to ask any supplier to demonstrate its software to you, and to feel reassured by their responses to the questions you ask about their solution and your requirements.

What will the customer experience be like?

There are broadly two types of software supplier and your experience of being their customer is likely to be different if the developer is independent or backed by external finance.
Independently owned. These tend to be smaller. The people investing are working in the business and their success is inexorably connected to the satisfaction of their clients. The service culture tends to be more human-to-human.
Capital-backed. Developers backed by external capital are motivated more by scale (and the economies that result). It suits their model for each customer to be alike and the style may be more corporate and less personal.

How can I believe what a software company tells me is true?

Look for external factual indicators. How long have they been in the market and how successful are they adding new customers and keeping existing ones? Is there a steady stream of credible case studies and testimonials collected over time? What independent awards or accreditations exist to support claims about the quality of product and service.

Finally…

Adopt a pro-active attitude to the relationship with your supplier. With a responsibility to manage risk, ask about the state of existing software and current/future compliance. If you’re unsure about the questions to ask or fearful of understanding the responses, seek advice from legal IT experts. Their input may help your law firm improve its performance in an increasingly digital sector.

Tim Smith, Technical Director at Insight Legal 

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