MTD investment represents an “opportunity rather than burden” for SMEs
Research has shown a widespread scepticism among small businesses in the UK
Research has shown a widespread scepticism among small businesses in the UK
SMEs can offset the costs associated with Making Tax Digital (MTD) compliance by leveraging cloud-based technologies and improving organisational health, according to market participants.
“Explore your options not just purely with an MTD hat on. You need to think about what else you can leverage from it that you’re not currently getting,” says Becky Shields, partner at Moore Kingston Smith.
“With the financial climate right now, you’ve got to make that kind of investment pay for itself.”
April 2022 will mark the rollout of MTD regulations for VAT-registered businesses with a taxable turnover below £85,000. The same measures became mandatory for larger organisations in 2019.
The new rules require businesses to keep digital accounting records and submit VAT returns using software that is compatible with MTD for VAT.
“These cloud-based systems do invariably lead to quicker management information,” says Shields.
“In business, you always have to see everything as an opportunity rather than a burden.”
But despite the looming deadline, research conducted by Xero has found widespread scepticism among UK SMEs around the costs and friction associated with such a shift.
The study of more than 4,000 small business owners found that nearly half are not confident in embracing new technology, and that UK businesses are least likely to agree that new technology would benefit them once integrated.
This attitude among SMEs could be costly, the report said.
Glen Foster, director small business at Xero, argues that this cost will predominantly come in two forms: software and training.
He also echo Shields’ stance, arguing that MTD compliance will provide a significant boost to general organisational health.
“This is bigger than government compliance – it’s about setting yourself up for the future and getting small businesses excited to put their accounts in the cloud and run their business in a different way.
“There are definitely costs associated with it, but equally, once you get over that training and learning curve, you’d hope that you’ll see a return on that in value.”
Scepticism and unwillingness – why?
The research by Xero also found that just 30 percent of UK SMEs said they would consider themselves “worse off” if digital investment is postponed.
Shields partly attributes this to HMRC, suggesting that not enough has been done from an education and readiness standpoint.
“HMRC themselves haven’t exactly pressed the issue. Therefore, I think the overall messaging hasn’t been as strong as it should be in terms of what non-compliance means to SMEs.”
Research conducted by HMRC in June 2019 (two months on from phase one of the MTD for VAT rollout) found that around 16 percent of businesses mandated to comply with the obligations had failed to do so.
The penalty for filing a return through the HMRC VAT portal rather than from software is £400. There is also a general regulatory penalty of up to £1,500 which HMRC can levy for not complying with the record-keeping requirements.
Shields also cites the general difficulty surrounding new technology as another key factor.
“Quite often they just don’t have the skills to make it land. The teams are relatively small and they are often entirely reliant on their advisers to produce those sorts of accounts.
“They’re not motivated to transform digitally themselves.”
Next steps for SMEs
In offering a stance on what needs to be done to overcome this widespread scepticism and achieve compliance in time for the deadline, Foster stresses the importance of seeking education and advice.
“HMRC letters have been dropping on people’s doors over the last few weeks telling them they need to comply, so job number one is carrying out that research and looking at which solution they need to be moving to,” he says.
“And we’d always urge small businesses to speak to their accountant or bookkeeper who will be up to speed with this and will have already navigated this change for VAT-registered businesses over the [£85,000] threshold. So it won’t be new to them.”
Shields gives a similar view, urging internal action among small businesses to review the current system and determine what needs to change.
“I think step one is to assess how you’re currently preparing your financial records, and then there needs to be a gap analysis to determine whether you’re compliant and what is required to make that happen.
“And once you’ve undertaken that analysis and decided what your options, then you need to reach out to your advisers again to make sure that it’s all set up properly.”