Software market unready for looming MTD deadline

A lack of simplicity and cost-effectiveness in the UK accounting software market may prove to be a major compliance hurdle for many businesses as the 2022 Making Tax Digital (MTD) for VAT deadline fast approaches, according to practitioners.

“Online accounting software has been and still is very expensive, and it takes a lot to learn because, in the main, it’s purposely designed for the accountant,” says Darren Fell, CEO at digital tax accounting firm Crunch.

This landscape plays into the hands of larger software providers, he argues.

“Ultimately, the aim is to feed that accounting channel lots of work and not take it away from them, otherwise they won’t recommend it to their clients,” he says. “Accountants are the perfect promoters, so I think we’ll see a lot more practice revenue being generated as a result of this.”

While roughly 1.2 million businesses (those with a taxable income exceeding £85,000) have been operating under the MTD rules since April 2019, the compliance requirement will extend to the remaining number as of April 2022. Broadly, the rules require businesses to keep digital records of their sales and purchases, and use software to submit their VAT returns to HMRC.

However, this forthcoming deadline may be cause for concern for many businesses, with a recent study carried out by The Accountancy Partnership revealing that around a third of UK SMEs are still using paper-based systems for VAT returns. In addition, one in 10 store essential documents in a drawer or shoebox, it found.

Similarly concerning figures emerged following the initial rollout of MTD for VAT in 2019, with some 120,000 businesses (around 10 percent) failing to meet the deadline.

According to Fell, the combination of these figures and the underdeveloped accounting software landscape may be cause for concern, with many businesses at risk of being non-compliant come the April 2022 deadline.

“Learning how to operate new software can be a massive undertaking for a business. Especially when it comes to generalist software, where you pack in all these features to cover all eventualities, and it makes it really hard to use it,” he says.

“The other obvious approach is to just keep the user interface absolutely clean and simple, and if there was more of that, it would arguably make this whole transition much smoother.”

This argument is broadly echoed by Jayne Simpson, indirect taxes technical officer at the Association for Accounting Technicians (ATT), who notes cost as a critical factor.

“The clear option is moving on to some kind of accounting package, but that is a big shift if you’ve been used to paper-based records,” she says.

“It’s all cost-driven. I’d question whether a small business can afford to outsource everything, or do they perhaps need to do it themselves but still receive some support every quarter from an advisor?”

ITSA and VAT overlap

But perhaps the most troubling aspect of the MTD rollout, according to Simpson, is the new requirements for income tax (applicable from April 2023) and their potential overlap with MTD for VAT.

If businesses implement new measures now with a view to achieving compliance by April 2022, they may become insufficient within a year, she argues.

“Whatever measures are taken, there’s that question of how long the method is going to be sufficient.

“The professional bodies have all raised concerns about the 2023 deadline – mainly that it’s just so fast on the back of Brexit and the pandemic, and the fact that the software to deal with all of this isn’t even out there yet.”

Fell also directly calls for more innovation in the accounting software space. He uses the example of more application programming interfaces (APIs) being made available as something that will generate simplicity and effectiveness for businesses.

“I’m asking for more connectivity and digital services from the government because it plays perfectly into this scenario,” he says.

“There is a new world out there that can stop people being stuck in the past. A lot of it can be eliminated by clean, usable software.”

Simpson goes on to suggest a basic method for smaller businesses to overcome these barriers and achieve compliance within the government’s timeframe.

“What we’ve seen is that the most simple way of doing a VAT return for smaller businesses is to just input it into a spreadsheet, and then use a free or low-cost bridging software,” she says.

Bridging software has become a point of contention in the MTD dialogue due to speculation of it being non-compliant. Though generally regarded as a misinterpretation, many believe it to be likely that HMRC will rule it out further down the line.

In effect, bridging software provides a digital link between data stored in spreadsheets and HMRC’s VAT portal.

“That’s probably the easiest way of becoming compliant on a less complex and lower cost basis,” says Simpson.