Only 45% of businesses plan to sign up to Making Tax Digital for VAT before deadline

With six weeks to go to the launch of Making Tax Digital for VAT, HMRC research indicates 81% of VAT mandated businesses are aware of the new requirements and a similar proportion have started to prepare for the changes, although only 45% plan to sign up before the April deadline

The findings are drawn from a telephone survey of 500 businesses carried out at the end of last year. Of these, 371 had VAT liabilities with a turnover above the £85,000 threshold and so are mandated to implement Making Tax Digital for VAT, 33 businesses had VAT liabilities and a turnover under £85,000 and 96 had income tax liabilities but no VAT liabilities.

In total, 81% of VAT mandated businesses were aware of Making Tax Digital either by name (70%) or the concept (11%).  The most common way businesses had heard was through a tax agent or accountant (43%). Awareness through other sources was significantly lower, although 13% had heard about Making Tax Digital via an email from HMRC, 11% had heard about it on the HMRC website and 9% had heard through a letter from HMRC.

Half of VAT mandated businesses (45%) said they planned to sign up to Making Tax Digital before the April 2019 deadline, and 7% reported that they had already signed up. A quarter reported they were relying on their accountant to advise on when to sign up. One in five did not have a clear idea of when they planned to sign up: 17% reported they did not know when they planned to sign up and 4% needed more information before they could decide.

Most (83%) of VAT mandated businesses aware of Making Tax Digital or the concept had started to prepare for the changes, most usually by discussing the changes with an accountant (54%) and starting to keep digital records (52%).

Six in ten VAT mandated businesses did not foresee any barriers to implementing Making Tax Digital, while for those who did, concern centred on there being new software or IT requirements (36% of those who foresaw a barrier) and a perceived financial cost (29% of those who foresaw a barrier).

Awareness of Making Tax Digital was significantly lower amongst income tax businesses (47%), who most commonly used paper methods to keep business records (82%), while one in three used only paper methods (29%).  However, 76% reported they felt comfortable using technology to manage business finances, and 72% said it would be easy to keep digital records of income and expenditure.

A small proportion of these businesses had plans to voluntarily sign up before April 2019 (15%) or after April 2019 (5%). However, 28% did not know when they planned to sign up to Making Tax Digital, 30% were relying on their accountant to advise them, and the others said they needed more information (16%).

Treasury statement

In a statement to the House of Commons on progress on Making Tax Digital Mel Stride, financial secretary to the Treasury, said: ‘The pilot for the Making Tax Digital VAT service has been running successfully since April 2018 and was opened up to the public in October.

‘I can announce today that over 16,500 businesses are now signed up to the service, and I would encourage all those businesses that will be mandated to use Making Tax Digital from April to sign up now and get used to the new service.’

On the issue of software availability, Stride said: ‘Some have questioned HMRC’s decision not to produce its own software for businesses, but I make no apology for overseeing the development of a diverse software-supplier marketplace that caters to a variety of needs, ensuring that businesses have the tools that they need to succeed.

‘More than 160 software products are already listed on HMRC’s software choices page as part of the Making Tax Digital VAT pilot, and I know of many others that are currently being developed.’

Stride said HMRC will have written directly to every business that is mandated to join Making Tax Digital by the end of this month, with 1.2m letters going out to signpost them to the help and support that they need in order to prepare. He also promised a ‘proportionate and light-touch’ approach to those who experienced difficulties with the new system, provided that individuals and businesses are not wilfully trying to avoid or change the amount of VAT that is due.

‘I must make clear that during the first year of mandation, penalties will not be issued for late filing but only for late payment. There will, of course, be a process to claim an exemption from Making Tax Digital on the basis of digital exclusion owing to factors such as disability or problems with access to broadband, or on religious grounds. Any business that is already exempt from online filing for VAT will remain so under Making Tax Digital without having to reapply’, he said.

Addressing the timing of the changes, which are close to the 29 March deadline for Brexit, Stride said Making Tax Digital ‘is designed to enable businesses to meet their UK tax obligations as simply as possible, regardless of the outcome of EU exit discussions, and is designed to complement other business tax obligations.’

‘HMRC has made good progress in preparing for Making Tax Digital. The pilots have progressed well and the full functionality of Making Tax Digital has been tested with a wide range of different businesses, including some below the VAT threshold which have chosen to take part voluntarily.

HMRC is ready, the software market is ready, and hundreds more businesses are getting ready every day by joining the pilot,’ Stride said.

Awareness

Brian Palmer, AAT tax policy adviser, said: ‘The level of awareness from VAT mandated businesses in Making Tax Digital so far (81%) is positive news. The fact that the most common way by far, that businesses had heard of Making Tax Digital is through a tax agent or accountant shows how important their role is in ensuring the smooth adoption of the system, and how important it is that businesses have an agent they can discuss this with.

‘Yet there’s still almost a fifth of businesses liable who the message needs to be communicated with, and who may not have started to prepare. So, we’re pleased to see that HMRC will now be ramping up its communications, using different channels to reach those last businesses.’

However, Adrian Rudd, chair of the joint CIOT/ATT digitalisation and agent strategy working group, said the fact that 20% of businesses mandated are unaware of Making Tax Digital and many are ‘hazy’ about the requirements called for a lot more work to address these issues.

‘Accordingly we would have liked the minister to have announced a one year deferral of mandation in order to allow businesses more time to prepare, especially during these challenging times.

‘The theory behind Making Tax Digital is broadly sound. A move to digital record keeping and submissions is logical and will ultimately be more efficient. But it should be allowed to grow organically, with systems created that are attractive enough that businesses choose to migrate to them, as has happened with online filing more widely.’

Rudd also urged caution for businesses who plan to sign up early, as doing so before fully ready will cause significant problems and needs to be timed correctly

‘Finally, we are still waiting for HMRC to publish the detailed guidance to explain when someone might be able to claim exemption from the new rules and how they should do this. This needs to be published urgently.

‘In the meantime some will be worrying unnecessarily about how they are going to cope with the new regime, while others will be left with very little time to prepare if their application for an exemption is turned down unexpectedly,’ he said.

HMRC spokesperson said: 'We hope that many businesses sign up to MTD before April but it’s not a cliff edge. Businesses are required to join MTD and submit their VAT returns using the new service for their first VAT period which begins on or after 1 April. For the majority, who file quarterly, their first MTD returns won’t be due until August or later.'

Mel Stride statement on Making Tax Digital is here.

Making Tax Digital – Monitoring Businesses’ Awareness of MTD is here.

Report by Pat Sweet

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