Representatives of small businesses and the accountancy profession say a report on Making Tax Digital for VAT shows that HMRC should provide additional support and allow businesses extra time to get it right when the next phase of the programme is rolled out. Some have also criticised the small sample size and lack of data, and question whether the report vindicates HMRC’s claim that the benefits of MTD outweigh the costs.
Exploring the costs and benefits of Making Tax Digital for VAT experienced by small businesses, prepared by consultancy Kantar Public, is qualitative research based on interviews with 31 small businesses who participated in the first phase of MTD introduction. It breaks them down into four groups ranging from those for whom costs outweigh benefits, to those where ‘clear and substantial’ benefits were recognised; but it doesn’t say how many businesses fit into each category.
The publication comes as HMRC is seeking to extend MTD for VAT to VAT-registered businesses with under £85,000 turnover, which will become mandatory next April. MTD for income tax is due to follow in 2023.
“This review is not as comprehensive as we would have hoped for,” says Emma Rawson, technical officer at the Association of Taxation Technicians. “Our own survey a year ago showed that members didn’t believe the benefits were as marked as HMRC believes, and I think we are still of that opinion. This is a very small sample and it’s qualitative not quantitative. I think we would like to have seen some numbers around costs, and we would like to have seen the distribution between the categories in terms of cost and benefit.”
Anita Monteith, senior policy adviser at ICAEW says the report finds that most of the benefits were obtained by businesses that used accounting software, and she points out that the next cohort of VAT-registered businesses under £85,000 turnover are less likely to do so. “I suspect most of those won’t have employees at all and so they will be at the spreadsheet end of the spectrum, and so they won’t be getting much benefit from having to make this change,” says Monteith.
There is strong consensus from small business groups that support should be extended and penalties should not be harsh as the roll-out takes place. Mike Cherry, national chairman of the Federation of Small Businesses, says it is crucial that the Treasury and HMRC listen to the feedback in the report before extending MTD. “These businesses suggest improved advice from HMRC on which software to choose (including on the trickiest decisions, such as whether to go for a bridging solution or full software), alongside financial grants to help purchase the software needed. Financial assistance will be vital in the next stage, when year one costs alone seem to be in the hundreds of pounds and can easily spiral to beyond £1,000 for larger SMEs.”
Monteith says the report highlights that a significant part of the cost attributed to MTD can be seen in terms of stress. “That’s particularly during the first submission they made when they were especially anxious about it. The UK has gone through so much stress in the last year and I think that the small businesses that are going to be next making this change will find this very hard. This evidence points to that as a factor we should be considering.”
Andy Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed (IPSE), says the report highlights that the next steps should be taken carefully.
“Looking ahead to the rollout of MTD to other areas, we believe the key is that the government should set sensible thresholds and timeframes – and ensure that at all stages there is a lengthy voluntary period before MTD becomes obligatory. Above all – particularly with the current financial strain on the sector from the pandemic – it is crucial that at no stage are self-employed people caught out and penalised during the introduction of a system that is, ultimately, meant to be for their benefit.” He adds: “We also welcome this report’s recommendation that HMRC produce MTD communications that are geared specifically towards the UK’s small businesses and self-employed.”
And at British Chambers of Commerce, head of economics, Suren Thiru, echoes many of these comments. “Rather than a lack of willingness to change among businesses, the process for rolling out MTD was undermined by poor communication and timing from government,” says Thiru. “Businesses also reported that they faced a huge expense to upgrade to MTD compatible software.” He concludes: “The future stages of MTD should be underpinned by better communication, creating increased awareness among businesses and facilitating access to more cost effective MTD compatible software.”