Making Tax Digital serviceability levels too low

HMRC has released a slew of research reports on progress with its flagship Making Tax Digital (MTD) online reporting regime, suggesting that businesses which have fully automated are seeing some benefits, but those with a hybrid approach are finding the transition more challenging

HMRC says by 9 March 2020 more than 1.4m businesses had joined the new service and more than 4m VAT returns had been submitted successfully using MTD-compatible software.

Over 83% of businesses in scope have signed up to the service and 95% of those who had signed up on time, successfully made their first return through the service on time.

For monthly filers, whose first return was due by 7 June, more than 91% have now signed up. Some £41bn of payments and over £13bn in repayments have successfully flowed through the new IT system.

Behind the figures, HMRC says ‘the vast majority’ of businesses and agents have proved able to meet the requirements of the first phase of MTD, but concedes that for a small number the transition has proved more challenging.

In particular, some agents have reported issues setting up their agent services account (ASA) and acting on behalf of their clients for MTD.

While HMRC has taken action to address this, it recognises there is still more to do and intends to continue its engagement with agent professional bodies.

Several agents and businesses reported that at busy times the API did not work. HMRC’s analysis shows that there are no issues with the API, but that there are issues with those APIs being consumed/processed by HMRC’s own internal systems.

This appears to the business/agent as if HMRC has not received the submission. HMRC is, as a matter of urgency, enhancing and rebalancing systems to prevent this failure reoccurring.

In its overview, HMRC also says that some businesses and agents have incurred more costs than expected in making the transition to digital filing, and there is some evidence that while the initiative has prompted development of a thriving software market, businesses can find it difficult to select the best option for their requirements and may be unaware of free packages.

MTD for VAT was extensively piloted, which HMRC said helped to identify and resolve some issues that could have had an impact on large volumes of customers.

However, there were others that surfaced only as numbers using the service increased after April 2019. For example, some businesses filed returns for incorrect (later) dates. Others joined the service but then sent their returns through the old VAT portal.

Since the MTD VAT service went live in April 2019 there have been a small number of periods of unplanned downtime due to technical issues.

However, over 94% of returns due in January 2020 were received in time for January 2020’s filing deadline, despite one of the temporary outtages falling on the day of the filing deadline.

HMRC has plans to further improve the overall performance and reliability of the services. In the short term, this means additional server capacity and special support teams that will be online and monitoring the entire VAT services platform to ensure zero impact through the VAT submission period.

The report suggests a more fundamental IT upgrade by mid-2020 should help to secure a more permanent improvement in service reliability.

Business response

Separate HMRC research looked at whether MTD for VAT has changed how people keep records for VAT purposes, whether these changes have reduced scope for error in VAT submissions, and ultimately, whether MTD for VAT can deliver additional tax revenue.

The research involved 60 in-depth face-to-face interviews with small businesses mandated to join MTD for VAT in October and November 2019, the majority of which had processes involving manual input and calculations and keeping physical copies of records.

The report identified three categories of response:  those who fully automated; those who partially automated; and those who used bridging software purely to make MTD-compliant submissions.

Those with full digital links reported reduced scope for error, potentially leading to additional tax revenue and both partially and fully automated businesses felt returns were more accurate, miscalculation errors were reduced, and they were able to correct errors quickly and easily.

However, those using bridging software tended to lack confidence and capability in using technology and so were frustrated with the changes caused by MTD.

This meant they were either too fatigued to check thoroughly, increasing the chance of a mistake, or were fearful of consequences, so took extra time and care.

There was thus no overall change in behaviour for these processes. These businesses felt that digitally linking calculations and figures from their spreadsheets onto software was an unnecessary step.

They could not see any benefit to their business, such as time and cost savings and seemed unaware of how the software could help them remain compliant after the ‘soft landing’ period for MTD.

HMRC said this group needs more support and better communication, arguing that they need to be made aware of the simplicity and time saving that is possible if they migrate to full digital links.

Awareness

Another of HMRC’s research reports looked at business awareness around MTD, which was addressed by four waves of communications and research projects.

It was almost universal at wave 4 (Jun-Jul 2019) where 98% of VAT mandated businesses were aware of MTD by name or concept, compared to six in ten in wave 1 (May 18), eight in ten in wave 2 (Nov-Dec 18), and nine in ten in wave 3 (Feb-Mar 19).

Use of software or apps amongst VAT mandated businesses increased across all four waves, although the bulk of the increase took place between waves 1 and 2 (69% to 79%). By wave 4, use had risen slightly to 84%.

However, HMRC says this means there were still around a sixth of VAT mandated businesses not using software or apps at the time of the wave 4 research, suggesting there is more work to be done to encourage these businesses to make the transition.

Eight in ten VAT mandated businesses used an external agent or accountant, so HMRC said communication with these agents is of high importance.

By wave 4, six in ten VAT mandated businesses reported they have already signed up for MTD (57%), and a further fifth (22%) planned to sign up before their first return was due.

This leaves a fifth that did not plan to sign up before their first return is due, either knowingly or because they did not know when they are planning to sign up, further suggesting that more encouragement is needed to persuade these businesses to make the transition.

Awareness of MTD was found to be consistently high; rising to 100% of agents aware of MTD by wave 3.

The main concerns for agents were around their clients’ awareness and digital capability, and HMRC system readiness. Across the three waves there was a reduction in concerns around HMRC system readiness and an increase in concerns around cost to business, which became a leading concern as the deadline approached.

The main benefits cited by agents were ‘improved record keeping’ and ‘live / up to date information’ and a third (33%, wave 3) agreed that MTD will make it quicker and easier for businesses to meet their tax obligations.

MTD for VAT Evaluating Making Tax Digital’s impact on record-keeping behaviour and scope for error among small businesses 

Making Tax Digital: An evaluation of the VAT service and update on the Income Tax Service 

Making Tax Digital – Monitoring Business’ Awareness of MTD – Updated 

Monitoring agents’ awareness of Making Tax Digital

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