Making Tax Digital for VAT: Treating Small Businesses Fairly Contents

Chapter 5: Taxpayer readiness

61.This chapter considers the readiness of businesses to meet their MTD for VAT obligations in April 2019, in light of HMRC’s preparations and software developments. Starting with levels of awareness among the affected businesses, it will then consider the software and implementation choices for different types of taxpayer and what still needs be done.

62.In our 2017 report we noted that “the readiness of … businesses for MTD for Business varies considerably. It depends on their awareness of their new obligations, the extent to which they have the necessary IT and book-keeping skills currently to use software for keeping business records, whether they rely on an agent, and the extent of internet connectivity.”41 It might be expected that, due to the passage of time and because MTD for VAT excludes businesses with annual income below £85,000 (which were included in MTD for Business), business readiness would be noticeably higher than in early 2017. However, the evidence we have received suggests that our assessment in 2017 remains valid today.

63.Although many witnesses supported digital record-keeping in principle, some saw no justification for HMRC to impose digital record-keeping requirements on businesses, especially where it would provide exactly the same information to HMRC as the current system.

64.There was questioning throughout our evidence of whether HMRC should mandate Making Tax Digital at all. It seems unreasonable to make people run their businesses in a different way just to produce the same figures for tax purposes. We have sympathy with the view that HMRC should not impose digital record-keeping requirements purely for tax purposes without compelling reasons, where they hold no benefits for a particular business.

Business awareness and planning

65.Research by the Institute of Chartered Accountants in England and Wales (ICAEW)42 in July 2018 revealed that over 40 per cent businesses due to be affected by MTD for VAT were not aware of it. A survey by OTS43 in October 2018 indicated that the figure not aware of MTD might be slightly lower, at 30 per cent, but both figures constitute a sizeable percentage of those affected.

66.ICAEW’s research44 revealed that 54 per cent of VAT-registered businesses use accounting software at present, a noticeable increase since its 2016 survey, but the proportion of businesses due to be affected by MTD for VAT using only paper-based records (13 per cent) is unchanged since 2016.45 HMRC’s expectation is that a large number of this group will move to software,46 but there is no evidence of any move in that direction at the moment.

67.The ICAEW survey found that 34 per cent of businesses aware of MTD expected to rely on their agent to deal with the changes. Another 35 per cent had acquired or would acquire new software. Some presumably were undecided, but 20 per cent had made no preparations. According to the OTS survey,47 less than 30 per cent of businesses were confident that they understood what would be required and less than 15 per cent of businesses said they were prepared.

68.The lack of awareness in some businesses in part reflects HMRC’s decision, discussed in chapter 3, to communicate primarily with software providers, agent representative bodies and agents. It would not inform taxpayers until they were invited to join the pilot. Many witnesses considered this too late. As Frank Haskew of ICAEW put it, “while some businesses are obviously ready, there is still a mountain to climb in relation to communication and making sure that businesses will be on board for this when it comes in.”48

69.A spectrum of business readiness has emerged, from those confident in their readiness, through those trying to prepare but hampered by lack of information, to those still wholly unaware or digitally excluded. It is concerning that a substantial proportion of affected businesses appear to be unaware of what they will be expected to do in five months’ time.

Software selection challenges

70.The first challenge for businesses which do not use the latest software packages and those small businesses intending to adopt digital accounting for the first time may be selecting the most appropriate system for them. Some are concerned that the lack of clarity on the longer-term direction of MTD makes selection more challenging, as they would strongly prefer to move to a system that would be compliant for all taxes.49

71.The decision in practice may be made by some businesses because of their accountant’s choice, to achieve compatibility of systems, or some may decide to ask their accountants to do more for them. Many may lack the expertise or confidence to inform their choice. Evidence from practitioner bodies and agents suggests businesses are simply not clear on choices.50

72.Additional concerns arise because HMRC refuses to ‘approve’ software products, limiting its involvement to listing products that have passed the technical test to link to HMRC systems. HMRC guidance states: “HMRC does not recommend or endorse any one product or software provider and is not responsible for any problems you have with software”.51 This is as unhelpful as it is unequivocal.

73.HMRC has suggested it will make available, perhaps in December 2018, a software selection tool.

74.We heard specific concerns about data retention through software product changes,52 responsibility for software problems and what consumer-protection obligations and standards HMRC is requiring of software providers.53

75.HMRC has however offered a ‘soft landing’ on penalties for businesses who cannot meet their digital record-keeping or filing obligations, and “where businesses are doing their best to comply with the law”.54 Although we welcome recognition of the challenges businesses face, it is not yet clear how HMRC will apply the soft landing and what burden it might place on smaller businesses.

76.Although MTD for VAT-compliant software may be available, there has been insufficient time to establish a competitive, accessible and diverse software market.

77.The lack of HMRC guidance or support for digital product selection means businesses trying to go digital for the first time face considerable challenges. The fast-changing software market and Making Tax Digital for VAT deadline in April 2019 compound the difficulty in making the best long-term choice. These businesses may not be able to make the right choice in time for April 2019 and would benefit from a longer timetable. They should not have to hope for a discretionary waiver of a penalty from HMRC.

78.Businesses using older software face costs of upgrading purely to meet Making Tax Digital for VAT requirements, since they are already realising efficiencies through their existing software.

79.We recommend that the Government urgently provides a support package for software system selection to businesses going digital for the first time and their agents, independently from the software industry.

80.We recommend that HMRC, as its software selection tool is developed, makes provision for establishing and certifying which software options are compliant with Making Tax Digital for VAT.

Progress towards implementation

81.Depending on their current readiness, businesses may go through various stages before MTD for VAT compliance is achieved: awareness; understanding; considering digital exclusion; software selection; skills development; training; and implementation and testing. Witnesses noted that this was a “not inconsiderable task”55 for some. It is considered particularly unfair on those business owners with less digital skills or training, who currently keep perfectly acceptable manual accounting records.56

82.Witnesses suggested that some owners may give up altogether rather than adapt to the disproportionate burden placed on them. One agent quoted a client as saying “If this is made compulsory I will pack up first”.57 As John Cullinane of the Chartered Institute of Taxation (CIOT) put it, “elderly business people or advisers might retire early or give up. It is anecdotal and speculative, but quite a significant possibility”.58

83.For the 34 per cent in the ICAEW survey who aim to rely on their agent for assistance with changes, there are concerns that agents may not have the requisite capacity. CIOT wrote:

“We are also concerned about the amount of agent help businesses will be able to obtain in the run up to April 2019 … many of our members will be helping their clients fulfil their Corporation Tax and ITSA filing obligations (December and January deadlines respectively) and so simply will not have the capacity to help businesses transition to MTD until February 2019 or later.”59

Regardless of capacity, witnesses said that an agent’s ability to assist with software selection at this stage is hampered by the late availability of software and the expectation they may have to assist with training.60

84.Even when businesses have decided to change to digital packages, witnesses stated that the transition takes time and is not necessarily smooth, even with agent support. One agent wrote: “some do pick it up well. However, many struggle. Some make such a mess of it that it is easier to ignore their efforts.”61

85.Many agents have undertaken a detailed review post-implementation of new systems, which has been illuminating. They cite examples of incorrect settings in software taking time to be found and corrected.62 A sensible implementation timescale needs to consider these.

86.The lateness in piloting has placed unreasonable burdens on taxpayers by reducing their time to prepare or test new systems.

87.As HMRC is relying heavily on agents to support their business clients, it needs to give agents greater support with matters such as software suitability and be more open to their feedback on the digital challenges their clients are facing.

88.Some small businesses are unrepresented or have little agent involvement in their tax affairs. The Low Incomes Tax Reform Group wrote:

“The majority of small self-employed individuals or businesses who are unrepresented are completely unaware of HMRC’s Making Tax Digital programme and the obligation to comply with MTD for VAT from April 2019. This is unacceptable and needs to be rectified as a matter of urgency.”63

This community may be the one least supported or enabled for MTD for VAT. Many may choose to seek agent support, which may raise concerns about affordability.

89.HMRC is alone in its confidence that all one million businesses will be ready for Making Tax Digital for VAT in April 2019. They have underestimated the time for research, planning, training and system changes that some businesses will need.

90.HMRC told us on 16 October that it was “significantly increasing its communications activity”64 to ensure businesses were ready for April 2019. With less than five months remaining before introduction, it is too late to begin an effective communications campaign.

91.We recommend that HMRC increases the communication and support available to agents, and listens to agents’ concerns. Within that communication strategy, HMRC needs to address how it supports unrepresented taxpayers.

92.Some businesses with complex affairs have been granted a six-month deferral after they complained about the April 2019 deadline. Smaller businesses also need to be heard by HMRC specialists and the case for further categories of deferral should be considered. In addition, specific support in dealing with implementation problems will be needed for unrepresented taxpayers.

93.Another concern relates to Brexit: in particular the uncertainty about its impact on businesses and their VAT reporting. That Brexit happens the same week as MTD for VAT means businesses may have to implement two significant changes at the same time. Witnesses were consistent in thinking that this coincidence created overly onerous burdens on business. This adds to the case for delaying the date for mandating MTD for VAT.65

94.The evidence presented to us suggests that HMRC, taxpayers and the software market are unprepared for the implementation of Making Tax Digital for VAT in April 2019.

95.We recommend that the Government defers the date for mandating Making Tax Digital for VAT by at least one year, while encouraging businesses to join voluntarily. This will enable further development of a competitive software market and specialist sector products, permit HMRC’s systems to be fully and appropriately tested, and allow taxpayers to prepare fully for implementation of new systems.

96.Deferring the date for Making Tax Digital for VAT will not by itself solve the concerns raised in this report, if HMRC does not start listening to the concerns of businesses and agents.

97.We recommend that HMRC plans a staged transition for businesses to join Making Tax Digital for VAT, and future stages of Making Tax Digital which allows for businesses, not just HMRC, to be fully ready. As part of this, HMRC should provide more information on their plans for Making Tax Digital for Business and Making Tax Digital for corporation tax. This will allow businesses to make informed long-term decisions about their software selection.

Long-term strategy for MTD

98.When the Government decided to defer the introduction of MTD for Business and focus on MTD for VAT, it did not cease its pilot or testing, which continued at a slower pace. The Government has not altered its intention to implement MTD for Business for income tax or corporation tax. It is still to announce if, or when, MTD will be mandatory for each tax, or whether MTD for Business might be extended to businesses with annual income below £85,000. The original MTD for Business proposals applied to those with annual income over £10,000. That figure looks untenable, particularly once the Chancellor’s 2018 Budget announcement to increase the personal allowance level to £12,500 is enacted.

99.While the delay to MTD for Business gives welcome space to focus on MTD for VAT, if MTD for Business is introduced in April 2020 there would be little time to learn lessons from the implementation of MTD for VAT.

100.The absence of a long-term plan for Making Tax Digital and digital data collection is a cause of business uncertainty. While businesses do not need to know precise dates, they do need to understand the future direction of Making Tax Digital.

101.It will be unhelpful for businesses, if they have invested in software for Making Tax Digital for VAT, to find they need to reinvest in alternative software for Making Tax Digital for business or corporation tax.

102.We recommend that the Government publishes its plan for the long-term development of Making Tax Digital, including key decision points, milestones and dependencies. This will give greater certainty, and the software industry the information it needs to develop software that will work across each different aspect of the Making Tax Digital programme. It will also encourage businesses to choose digitalisation for productivity, efficiency and modernisation reasons rather than just tax compliance.

103.We recommend that the next stage of Making Tax Digital is not implemented until April 2022 at the earliest. At least two years are required to learn and act on lessons from the implementation of Making Tax Digital for VAT, and a further year will be required for the software industry and taxpayers to prepare.

41 Economic Affairs Committee, Draft Finance Bill 2017: Making Tax Digital for Business (3rd Report, Session 2016–17, HL Paper 137)

42 Written evidence from ICAEW (DFC0073)

43 Q 16 (Paul Morton)

44 Written evidence from ICAEW (DFC0073)

46 Q 44 (Theresa Middleton)

47 Q 16 (Paul Morton)

48 Q 9 (Frank Haskew)

49 Written evidence from ICAS (DFC0068) and ICAEW (DFC0073)

50 For example, written evidence from ICAS (DFC0068), Hillier Hopkins (DFC0070) and David Jeffreys (DFC0046).

51 HM Revenue & Customs, Find software suppliers for sending VAT Returns and Income Tax updates, (24 October 2018): [accessed 26 October 2018]

52 Written evidence from Kevin Ringer (DFC0064)

53 Written evidence from the Federation of Small Businesses (DFC0076)

55 Written evidence from Christopher Prescott (DFC0055)

56 For example written evidence (DFC0042), Joe Quinn Tax Ltd (DFC0040), Kevin Ringer (DFC0064).

57 For example, written evidence from John Stone (DFC0004)

58 Q 11 (John Cullinane)

59 Written evidence from CIOT (DFC0071)

60 Written evidence from Richard Pepper (DFC0034)

61 Written evidence from GBM Accounts Ltd (DFC0025)

62 Written evidence from Christopher Prescott (DFC0055)

63 Written evidence from Low Incomes Tax Reform Group (DFC0067)

65 Written evidence from Low Incomes Tax Reform Group (DFC0067), Institute of Chartered Accountants of Scotland (DFC0068), Hillier Hopkins LLP (DFC0070), Chartered Institute of Taxation (DFC0071), CBI (DFC0079), National Farmers’ Union (NFU) (DFC0084)

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