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Described as “the biggest transformation of the tax system in a generation”, Making Tax Digital (MTD) came into force for more than a million businesses earlier this year.
The Government scheme was first announced in 2015, with the aim of fully digitising the tax system by 2020. That originally included phasing out self-assessment, but plans to mandate any taxes other than VAT have been put on the backburner for now.
The scheme’s first mandatory stage, MTD for VAT, launched on 1 April 2019, requiring VAT-registered businesses with a turnover above the VAT threshold of £85,000 to keep digital records and file their returns through compatible software.
Now about six months into its implementation, the first three quarterly filing deadlines have taken place, meaning most VAT-registered businesses should have now signed up and filed at least one return under the scheme.
Looking at the numbers alone, the rollout of MTD for VAT seems to be going relatively smoothly.
The most recent data from HMRC shows there were 1.1 million sign-ups and 1.2m submissions by September, and around 94% of those who had signed up before the first two deadlines were able to file their return on time.
Tom Rich, partner at Obsidian Accountancy, said that for most of his clients, the change wasn’t too significant.
“The bulk of our clients were already using digital accounting systems,” he said. “So there’s been no huge transition for them. Most of the software available now is MTD-compatible, so on the whole it’s been fairly simple.”
Online filing is certainly nothing new, as an HMRC paper from 2015 reported that 99% of VAT returns were already submitted online.
However, adjusting to software might not be as easy for everyone. An Ipsos Mori survey published in 2017 found that 51% of small businesses and landlords above the VAT threshold used software to manage their tax obligations.
For the remaining 49%, complying with MTD could mean spending more on software, on training, or on their accountant.
That’s something Tom recognised among a small number of his clients.
“We do have some clients who use more traditional bookkeeping methods, and a handful are still using manual records, so for them it's been a challenge.
“Some of those people have suffered a little bit financially, because it's an additional cost compared to the way they were doing it before.”
But for many, he said this would be outweighed by the benefits of switching to accounting software.
“If you’re just using cash books, you still need to compile all your information to find out how the business is performing. But if you’ve got all the data in the system, you can use that to give you real-time reports on business performance.
“And as accountants, we can tell our clients at any given moment how the business is doing, or we can spot anomalies.
“You can look at different reports that you might have had no idea about before, or you might have had to wait to the end of the year to see, and that can help you with your budgets and cashflow.”
Of course, the rollout of MTD hasn’t been without its problems, and we’ve seen a few reports of difficulties on the forums.
UKBF user paulears, for example, said earlier this month that his accounting software had automatically taken incorrect payments from his account by direct debit.
While the Revenue had refunded the payment, he pointed out that a sudden debit like this could become expensive to repair for anyone running their account balances tightly.
Others in the same thread reported issues where HMRC had instead failed to take the payment, resulting in an unexpected default letter.
Problems with direct debits were among the issues raised by the Treasury Select Committee, which wrote to HMRC in June 2019 about some initial problems with MTD.
HMRC said in its response that it had taken steps to prevent technical issues that had affected direct debits, and that it was working with its customers to correct their accounts.
Perhaps most frustratingly for those business owners who encountered difficulties early on, HMRC’s VAT helpline was also affected by long delays between January and May.
The Revenue explained that the service had been impacted by “ongoing recruitment and staffing shortfalls”, as staff were diverted for no-deal Brexit planning.
Its performance seems to have improved since, with a letter from the HMRC team working on MTD to its stakeholders reporting that wait times for the VAT helpline had remained within a five-minute average during August and September.
The MTD team added:
“For the vast majority of businesses and agents the service works as intended, with good feedback on customer experience. However, for a very small minority the experience hasn’t been as we had intended and for which we apologise.
“We continue to make strong progress in resolving issues as quickly as possible and we are using that learning to improve the services we offer going forward, to provide a positive customer journey for everyone.”
With only a small number of taxpayers experiencing problems and issues being ironed out, it’s safe to assume that MTD will be extended to other taxes in the near future. So even if your business hasn’t been included at this stage, it’s worth getting ready now.
Self Assessment is, in fact, live although only for a minority of taxpayers.