Making tax digital: Too much of a burden on small firms?

  • 01 Mar 2022

Three years after the initial introduction of Making Tax Digital, more small firms will have to comply by April. But, despite the promised efficiency gains, many concerns remain. David Adams asks whether MTD is a blessing or a curse.

About 700,000 businesses – those that are VAT-registered with an annual turnover of less than £85,000 – will need to meet the April 2022 Making Tax Digital (MTD) for VAT deadline, by starting to use MTD-compliant software to submit quarterly VAT returns online.

Some are already doing so, using the MTD VAT portal alongside businesses with turnovers of more than £85,000, which were mandated to use the system from April 2019. FSB research suggests 70 per cent of all small businesses have already started using MTD for VAT, including the 60 per cent mandated to do so in 2019.

 

However, FSB’s 2021 Tax Survey showed that one in six ( 17 per cent) small businesses with no employees, and 9 per cent of those with employees, were still using paper-based tax filing processes. For them, and for businesses still using non-MTD-compliant software, with inadequate broadband services, or with business processes at odds with quarterly VAT returns, meeting the deadline may cause difficulties. FSB is concerned about this, how much compliance will cost, and whether MTD will achieve its aims and help create a better, fairer tax system.

In October 2021, the FSB published a new report, A Duty to Reform, examining the major problems affecting the UK tax regime for small businesses, and making recommendations for reform and for drawing maximum benefit out of the MTD project. FSB is working closely with the Government to inform businesses about MTD, and in the meantime has partnered with Rhino Software to develop an app that will enable members to meet MTD requirements. FSB members will be able to access a free edition and online chat (see ‘FSB Making Tax Digital app’, overleaf). 

Tax burden 

Duty to Reform estimates that the annual collective cost of tax compliance for the UK’s small businesses is £25 billion. Worse, while the average annual cost for a business not yet using MTD is £2,690, the average bill for those that are is £4,562. FSB Senior Policy Adviser Daryn Park points out that the cost of subscriptions for MTD-compliant software is also likely to be considerably higher, relative to business size, for the smallest businesses. 

FSB’s research also revealed negative perceptions and experiences of MTD among small businesses. More respondents ( 35–38 per cent) said they did not agree that MTD provides efficiency gains, made planning cash flow easier or reduced complexity in the tax system, than those who said it does deliver those benefits ( 22–30 per cent). 

Even among businesses already using MTD, more respondents said they are not experiencing those benefits. It is also worth noting that the Government’s own assessment of the impact of MTD VAT on all businesses using it (published in July 2021) showed that only 30 per cent of respondents thought the benefits of MTD outweighed its costs.

FSB also expressed concern that businesses locked into using software to file income tax and VAT returns could face significant increases in subscription costs in future. In recognition of this concern, FSB members will be able to access a free edition of MTD software with all the functionality and features to be able to submit their VAT return to HMRC and become MTD compliant. 

 

The fact that not all businesses have access to fast broadband may also cause problems. “Shifting a tax system to be entirely digital is going to create issues for businesses finding it hard to get online,” says Mr Park, noting that previous FSB research has shown that about 50 per cent of small businesses think their current broadband is insufficient for future needs. 

Christopher Downing, Director of Product Marketing for Accountants and Bookkeepers at Sage, argues that superfast broadband is not needed to move financial documents to the MTD VAT portal, and that strong mobile phone signals will help some business owners to use software such as Sage, Xero and the FSB MTD app via smartphones.

He also points out that the software can also be used offline.

Mixed picture

Glen Foster, Director of Accounting Partners, UK and EMEA, at Xero, says there are significant differences in terms of the preparedness of small firms. “There will be small businesses that are struggling with this,” he says. “But others may be working with an accountant who will help them through this process.”

Dionne Sherwood, an accountant and founder/owner of DS Small Business Help, based in Aberystwyth, Wales, expects things to run smoothly for her clients and for any small businesses which work with an accountant that has adopted cloud-based accountancy software. “I tell clients this will help them manage their business much more effectively,” she says, outlining the benefits of using a software package that integrates quotation, invoicing, expenses and tax submission processes: “It means they spend a lot less time doing bookkeeping tasks.”

Another accountant, Nicole Christie, is co-founder and self-styled ‘chief geek’ at Sllick, an accountancy practice based in Aberdeenshire and Glasgow that bases its services on cloud-based accountancy software. “All our clients are MTD-ready,” she says. “The move has many benefits. Financials should be up to date, in a format that can make completing tax returns a breeze or allow accountants to help remotely. We have saved clients hundreds of hours of admin. People need to think about this as being more than just complying with MTD: it’s about changing the way their business operates.”

Time to act 

If your business – or accountant – has not moved far towards using MTD, what can you do to ensure you meet the April deadline? Ms Sherwood urges small firms in this position to investigate the cloud-based software packages approved by HMRC, which are listed on the HMRC website (see ‘Further information’). The FSB Making Tax Digital app is listed here under ‘free software’. Mr Downing points out that one advantage of cloud-based software and apps is that they allow businesses to experiment at low cost, to find out which suits their way of working.

 

Once up and running with MTD for VAT, using MTD for income tax should be relatively straightforward. Sole traders not registered for VAT and anyone who lets a property to tenants and earns more than £10,000 from these activities should also be thinking about MTD, as they will be among 5.4 million businesses that will have to start using MTD for Self-Assessment Income Tax by April 2024. 

Mr Foster hopes that by 2024, “we’ll have started to see the full benefits of MTD for VAT”. At present, FSB’s view of MTD to date is that it is failing to provide small businesses with the benefits that were promised. “It was meant to make cash flow easier, but complexity hasn’t lessened,” he says. “Costs have gone up and efficiency hasn’t improved.”

As well as seeking improvements to ensure those aims are fulfilled and costs minimised, FSB wants the Government to do more to ensure small businesses are aware of all the tax reliefs to which they are entitled. One way to do so would be to create a free feature within MTD software that will notify businesses about reliefs to which they may be entitled. 

FSB wants MTD to succeed, because the effective application of innovative digital technologies to the UK’s tax system could benefit every business in the country. Xero’s Mr Foster is optimistic. “FSB has a point: right now MTD is not delivering everything,” he says. “But we will get there. We’re working through a change and it will be difficult for some businesses. But it has lots of benefits.”

Mr Park is also hopeful, but stresses the importance of further Government action and support for small businesses. “I think eventually things will improve,” he says. “But in this transitory period the Government and HMRC should do more to make sure it’s not too burdensome. 

The FSB Making Tax Digital app

FSB has partnered with Rhino to build an app designed to help small businesses and the self-employed become MTD compliant without the confusion or pressure. Features include customer management, invoicing and payments tracking, and expense management. 

A chat facility provides access to support, and there are also video tutorials. 
As well as ensuring compliance, a Finance Dashboard provides a live picture of a company’s current trading position. 

A web browser-based version can be downloaded via the FSB website, or the app can be found in the Apple App and Google Play stores. Get to know the system with a ‘play’ account and upgrade to a free edition when you’re ready. You can upgrade your licence at any time for additional functionality and features to the Micro Edition at just £5 + VAT per month, or the Basic Edition at £12 + VAT per month. The FSB Making Tax Digital app is available to FSB members and non-members but exclusive discounts and online chat are only available to FSB members, saving £96 + VAT per year on the Basic Edition. You’ll have support from FSB specialists, in-app guides and online chat every step of the way.

Rhino Software CEO Eugene Blaine says the system is designed for ease of use and flexibility, with all features available across every platform. It can be used alongside bridging software that businesses may use to link into existing spreadsheet-based processes.

 

One business using the app is Epic Design, a graphic design company based in Totnes, Devon. “I look at the MTD VAT section and I can see all my previous returns, then I can click into them and see what’s been paid,” says Director Jonathan Gale. “I invoice people, enter my expenses and it keeps a tally. I then make final amendments and can submit it. It’s all done in half an hour.

“I used to have to put a couple of days aside for going through all the payments and financial documents, but now it’s all on there and the accountant has access to it as well.”

For more information click here

Further information

 FSB: fsb.org.uk/join-us/membership/fsb-member-benefits/making-tax-digital 
 tax.service.gov.uk/making-tax-digital-software
 gov.uk/government/collections/making-tax-digital-for-vat

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