The survey also showed that although there has been a significant increase in the number of businesses now using accounting software, a quarter of all businesses are still using a paper based accounting system – unchanged from two years ago. Paper based records will not be permissible for Making Tax Digital for VAT.

Only 54% of VAT registered businesses currently use accounting software.  Of the 25% relying on paper based records alone, 13% are businesses that will need to implement Making Tax Digital for VAT.

Overall, the institute’s research found 38% of all UK businesses now use accounting software for keeping their accounting records, a significant increase since 2016. This increase seems to have come from businesses which had previously been using a mixture of electronic and paper-based systems.

A third (34%) of the businesses surveyed reported they will be relying on their accountant or tax adviser to deal with the changes for them, 20% will be buying new accounting software and 15% have done so already. However, 20% of businesses that will need to implement Making Tax Digital for VAT have not yet made any preparations for it.

Anita Monteith, ICAEW technical tax manager, said: ‘We continue to fully support HMRC’s ambition to increase the use of digital technology, but we are concerned that based on these results many businesses are not going to be ready for implementation in April 2019.

‘The lack of awareness among businesses about Making Tax Digital is of concern and needs to be addressed: the communications on Making Tax Digital do not appear to be getting through to VAT registered businesses.

‘It is also clear that even among businesses that are aware of Making Tax Digital for VAT, many of them have not started to prepare to implement it. Given the need to review existing systems and potentially evaluate, purchase and test new software, this is a worry.’

From 1 April 2019, Making Tax Digital for VAT will become compulsory for VAT registered businesses making annual taxable supplies of over £85,000. New rules will make digital record keeping for VAT compulsory as well as introducing a new requirement to file VAT returns directly from software.

HMRC guidance

HMRC has issued fresh guidance on how businesses should prepare for Making Tax Digital for VAT. This states that a pilot started in April 2018 and is currently in a private stage, available only to invited volunteer VAT businesses and their agents.

HMRC continues to limit the number and types of business invited to join the pilot, stating: ‘This is so we can work with software providers, testing our systems and their products on a small scale before opening Making Tax Digital to a wider audience.’

The latest guidance also states: ‘We’ll publish details of the VAT software available later in the year, when we open the VAT pilot to more businesses’

HMRC says it is working with more than 150 software suppliers who have said they will provide software for Making Tax Digital for VAT in time for April 2019.  The current list of suppliers who have software approved for the pilot stands at around 40.

The guidance states that HMRC will give businesses until 31 March 2020 to make sure there are digital links between software products. Before that date, cut and paste will be an acceptable way to transfer information.

The exception to this is where return information is to be transferred to a software product enabled for an Application Programming Interface (an API provides a secure link between software and HMRC) and designed to submit the 9-box VAT return (such as bridging software). In those circumstances the transfer of information must only be digital.

Making Tax Digital: how VAT businesses and other VAT entities can get ready is here.

Report by Pat Sweet