Why are businesses unprepared for Making Tax Digital?

HMRC's flagship tax scheme comes into force on 1 April, yet one fifth of businesses say they know nothing about it.

by Stephen Jones
Last Updated: 01 Apr 2019

Despite numerous calls from business groups for a delay, and having being described by one parliamentary peer as a "bit of a car crash", HMRC’s flagship scheme Making Tax Digital (MTD) comes into force today.

It means almost every VAT registered business with a taxable turnover of above £85,000 will have to register its tax records using HMRC compliant software. Paper returns will no longer be accepted, and businesses that fail to comply will be subject to penalties.

Although 98 per cent of UK businesses already file VAT returns electronically, HMRC says that streamlining the system will make it more efficient for bosses (and the Exchequer) to keep track of their bills - and put Britain well on its way to becoming one of the most advanced tax administrations in the world.

It would appear however, that UK plc has been less enthusiastic.

Float, a cash flow management firm, claims that a freedom of information request lodged to HMRC revealed that as of 22 March only 55,250 of the 1.2 million businesses mandated to register have done so.

This backs up concerns raised by the British Chambers of Commerce - among others - which has called for Chancellor Philip Hammond to delay the introduction of the scheme after a study found that 19 per cent of businesses have never heard of it. HMRC also admits (in a February 2019 study) that nearly one fifth of businesses said that they knew nothing about MTD.

Of course it’s plausible that over a million business have sprung into life and registered in the week or so since the freedom of information request release, but it seems unlikely.

So why are businesses so unprepared for the initiative, and could more have been done to prepare them?

Restaurateur and former Dragons’ Den investor Sarah Willingham has been working with accounting software provider Xero to prepare smaller businesses for the change. She blames a mixture of inertia, misunderstanding and the fact that there have been "bigger things" in the news keeping business leaders distracted.

"Under normal circumstances I do think it would be talked about a lot more," says Willingham. "Brexit seems to have completely taken over the universe and I don’t think that anybody is actually looking at anything else."

Although she feels that the government’s timing -  a couple of days after the UK was supposed to leave the European Union and on the same day as increases to the national minimum wage and pension contributions - isn’t wrong, but she does feel that HMRC could have done more to promote the initiative.

Katrina Cliffe, managing director of Huddersfield based KC Communications, agrees. KC is registered for MTD, but Cliffe says this is due to nudges from her accountant and the fact that her firm was already using compatible software - i.e. it was not due to direct marketing from HMRC, although she says she did have some alerts from the government.

Another reason Willingham suggests is that many bosses - particularly of smaller business - think that the transition is more complicated than it actually is. She highlights that, aside from the potential costs of migrating software - which the Federation of Small Businesses estimates to be an average of £564 a year - the process is "so unbelievably idiot proof" once the right software has been found.

So should unregistered companies be worried? HMRC says that "businesses which fail to comply with regulatory requirements" are liable for fines, but Simon Armstrong, outsourcing senior manager at accountancy firm Menzies LLP, says firms still have plenty of time.

"The April deadline is a little misleading,"  says Armstrong, explaining that MTD relates to VAT periods starting on or after 1 April, with reporting for some organisations including trusts and certain non-profits delayed until October. The bottom line is that a business should only register for MTD (by establishing a new Business Tax Account) when it is ready to file its first VAT Return.

That doesn't mean that bosses should be dragging their feet. MTD is a permanent change to the system, so everyone is going to have to do it sooner or later. Given that HMRC dished out £59m in fines relating to "careless behaviour" around tax in the 2017-2018 financial year, any system that saves businesses time, reduces mistakes and increases transparency is well worth embracing.

For more information on how to submit returns compliant with Making Tax Digital, see this HMRC guide.

Image credit: Pixabay/Pexels

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