In the face of it, the Government’s Making Tax Digital (MTD) programme does exactly what it says on the tin. Aimed at reducing accounting errors – and the tax gap (research by Funding Options suggests HMRC is owed £3 billion in outstanding VAT for the year to March 2018) – MTD makes it mandatory for businesses to maintain digital accounting records and file electronic tax returns, using software compatible with HMRC systems.
In practice, the initiative has been less straightforward, with delays to the timeline and a paring-down of the initial rollout – including the exclusion of the very smallest businesses.
Now, for companies whose turnover puts them above the £85,000 VAT threshold, part of MTD is about to become a reality, with quarterly digital VAT reporting mandatory from April 2019. The rules cover sole traders, partnerships, landlords, limited companies, trusts and charities, with a six-month deferral date available for only the most complex businesses.
But with MTD-Day fast approaching, Lorence Nye, FSB Policy Advisor for economics, tax and financial affairs, is concerned that businesses are ignorant of the implications.
“They may have heard of it, but they don’t know how it’s going to affect them,” he says.
“Around 60 per cent of FSB members are likely to fall within the remit of MTD for VAT and, for anyone who’s mandated, it should be a really big concern.”
Research by the Institute of Chartered Accountants in England and Wales (ICAEW) in September 2018 found that more than 40 per cent of businesses within the scope of MTD for VAT were unaware of it. It also showed that, although there had been
a significant increase in the number of businesses using accounting software, a quarter are still using a paper-based accounting system – and paper-based records will not be permissible for MTD for VAT.
To raise awareness, from January to March, FSB will host MTD webinars
and seminars, while a dedicated section of its website offers a downloadable factsheet and information hub. “We’re also encouraging members to speak to their accountants, because they have the most accurate information for individual businesses,” adds Mr Nye.
The Government is also promoting MTD recognition. “Following the launch of our public pilot, we are now increasing our communications activity,” says Theresa Middleton, Director of Making Tax Digital for Business at HMRC. “This includes writing directly to all businesses within scope of MTD before the rules come in, to ensure they are aware of the changes and what they need to do to join the new service.”
The MTD for VAT pilot scheme is an opportunity for businesses to begin filing digital tax returns before the programme officially starts. The public phase opened in October, with capacity for 500,000 eligible businesses. “We’ll be expanding it to even more customers over the coming months,” says Ms Middleton.
For the tech savvy, MTD shouldn’t present a challenge. “Those that are already submitting VAT returns directly from accounting software will notice little change if their software provider upgrades the product to make it MTD-for-VAT compliant,” says Caroline Miskin, Technical Manager at the Institute of Chartered Accountants in England and Wales (ICAEW) tax faculty.
But while the main software providers are all over MTD, businesses should ensure there will be no surprises in April. “Rather than waiting until the service is mandated, small businesses should check when their software will be MTD compatible,” says Ms Middleton. All viable software is listed on gov.uk.
For the paper-bound, MTD will involve a seismic shift in bookkeeping as physical ledgers give way to the cloud. “You’ll no longer be able to take a bunch of receipts to your accountant to fill out the return for you,” says Mr Nye.
“You’ll have to have a digital record of all transactions. Spreadsheets with summary information might not be acceptable, and there will have to be an API (application programme interface) that communicates with HMRC’s software so data can be downloaded directly from your files. That’s where the real change will be.”
Another change will be in the role of accountants, as both advisors and number crunchers. “For those businesses that still maintain paper records, their accountant will need to do additional work to prepare digital records before filing the VAT return, which is unlikely to be a cost-effective solution,” warns Ms Miskin.
“Businesses should have a discussion with their accountant and decide what work the business will do itself and what will be outsourced. Most accountants will be able to advise on choosing accounting software and assist with training and implementation.”
Chantal Baker, Director at accountants and tax advisors Champ Consultants, says her firm is providing clients with access to accountancy software. “We cover this cost as we understand there are additional costs in this new initiative, and we also offer them one hour of free training on the software,” she says.
Those going it alone will have to look elsewhere for support. “Businesses not using software and which don’t have an accountant are in the most difficult position, and many will need external advice on choosing and implementing appropriate software,” says Ms Miskin. “One option is to speak to friends and business contacts in similar situations.”
Small businesses’ resistance to technology could hamper the transition to MTD. FSB’s Learning the Ropes report found that 26 per cent of business owners in England lack confidence in their basic digital skills, and 22 per cent believe a lack of basic digital skills among their staff is holding them back from increasing their digital and online presence.
The research also highlighted poor broadband as a barrier to digitalisation.
Embracing new technology means paying for it, and MTD-compatible software could be an unplanned expense. “Businesses using older software that they purchased outright may incur a significant cost if the provider requires them to move to a newer, subscription-based product,” warns Ms Miskin. “Businesses using bespoke systems, or a suite of different systems and spreadsheets, will likely need to purchase a spreadsheet-bridging product with the functionality to submit a return to HMRC.”
Mr Nye doesn’t believe small businesses should carry the cost. “We’re hearing anecdotally that the cost is a lot higher than HRMC predicted, so if the market isn’t providing something affordable, the Government should look at offering grants that will take the pain away from that first outlay.”
The UK’s complex tax system is already a drain on small businesses. FSB’s Taxing Times report found that the average UK small business spends £5,000 and 15 working days every year on tax compliance, while more than three-quarters pay a specialist to handle their tax. These figures are unlikely to reduce with MTD.
Despite these challenges, the initiative is inevitable. MTD aims to create one of the world’s most digitally advanced tax administrations, improving efficiency and compliance – a huge step towards a digital Britain.
The potential benefits for small companies should not be ignored. The introduction of MTD is an opportunity for small businesses to increase efficiency, standardise processes, reduce errors and enable more proactive tracking. By submitting tax digitally, businesses will gain control over their data, and become more integrated with
the industries in which they work.
Day-to-day, accounting technology will help companies manage cash flow. “Digital record-keeping can give better management information, allowing businesses to control cash and credit more easily and analyse the profitability of different parts of
their business,” says Ms Miskin.
“Better business decisions can be made, as all the information will be available,” agrees Cheryl Price, founder of CH Accountancy & Bookkeeping. “Businesses will also be able to be more organised and save for tax bills as they’ll know an estimate of their tax liability. Keeping on top of finances will allow more contributions to pensions, or other strategic tax planning, meaning lower tax bills.”
Money will also be saved through greater accuracy. Paperless systems result in fewer mistakes, which can grow into serious discrepancies and result in lost revenue or even fines.
As well as cash, some feel MTD could save businesses valuable time. With tax returns submitted quarterly, the enormous hassle at the end of each tax year is eliminated.
Using cloud accounting software also means that many of the other time-consuming parts of daily business admin, such as chasing unpaid invoices, are automated.
It will even save storage space, points out Ms Price: “Going digital means less paperwork as receipts and invoices can be kept digitally, so businesses don’t need to store paperwork for years.”