As the government announces the next phases of Making Tax Digital, are small businesses on track?
Last week, the government announced the next phases of MTD, coming in 2022 and 2023, respectively. The roll-out of MTD will take place as follows:
- 2022: All VAT-registered entities will have to use MTD-compatible software to file their VAT Returns from periods starting on or after 1 April 2022.
- 2023: From April, MTD for Income Tax will be introduced for unincorporated entities and landlords with an annual turnover above £10,000.
- MTD for Corporation Tax: a consultation document is expected to be published in the Autumn.
With the chaos of Covid-19 still hanging over the business community, are small businesses on track for MTD readiness? Accountants give their verdicts.
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Coronavirus has encouraged more cloud take-up – but more needs to be done
Kathryn Preston, owner, Fletcher Thompson Chartered Accountants
The answer is kind of yes and no. There are always clients that will hold out – the information they’re preparing now isn’t Making Tax Digital-ready. That’s where our focus is.
What scares me is the unrepresented sole traders and small businesses. I’d like to think that we as a profession are talking to our clients about this and giving them their options, whereas the people who are doing their own tax returns are either going to bury their heads in the sand and think they can get away with being unaware of it, or they’re going to take well-meaning but ill-informed advice on social media platforms.
Covid-19 has made people wake up to the fact that they need better financial information. Often the answer to that is cloud software. The people that have made that transition will be ready. So that will help.
However, there are still a lot of people out there that haven’t moved onto software. There are still a lot of people who aren’t aware or have chosen not to do anything about it. I was talking to somebody yesterday who dismissed the need for regular financial information because he knew how much he has in the bank. That’s not going to help him with Making Tax Digital.
Next steps: We’re trying to encourage clients to get into the habit of doing it so that it doesn’t become something very scary in 2023. It’s best to move them across now.
Verdict: There is still a lot of small businesses that are unaware, willfully or otherwise, about what they need to do with MTD.
Businesses are starting to wake up to the urgency
Alexandra Bond Burnett, co-founder and MD, Blue Arrow Accounting
Are small businesses ready for it in general? No. As a digital practice, you surround yourself with people that are using digital technology, so you get stuck in a bubble. However, we’ve had a few companies come to us recently that don’t have that kind of system in place, which made us realise that if you look at the statistics, there’s a huge number of small and micro businesses that aren’t prepared to have everything online.
We’re inheriting businesses that have been with the family accountant for 30 years and mistakes are being made. For those near retirement age, a lot of change is happening and it’s not really being acted upon. So there’s this influx of clients that are starting to realise that they need to get on it and aren’t really with the right accountancy practice to make it happen.
Next steps: We’ve been providing more and more training for small businesses and small business owners, using MTD compliance as a bonus selling point for that.
Verdict: A lot of businesses aren’t ready, but they’re starting to realise it’s necessary – and are looking for new accountants as a result
The MTD roll-out has not been smooth – a lot of businesses won’t be ready
Dean Shepherd, lead technology product manager, Wolters Kluwer Tax & Accounting UK
In short, no. The roll-out of MTD for VAT should have been straightforward in terms of digitalising a tax process, but it’s been widely criticised. Rather than making VAT filing more compliant, many believe it has made it significantly less so.
There will be hundreds of thousands of small businesses for whom completing their tax return is a once-a-year process from a pile of receipts they keep in their desk drawer. The chances of getting all these businesses to suddenly start recording all their income in MTD-compliant bookkeeping solutions and filing reports of their income and expenses quarterly are slim.
The more successful accountants have been extolling the virtues of digital record-keeping, whether MTD for ITSA comes to fruition or not. They educate their clients regarding how digital tools (such as Twinfield and Basecone) can automate bookkeeping and take away the stress of doing it all in one go. They’re then able to deliver regular insight into how their clients’ businesses are performing, becoming a trusted partner as a result.
Next steps: Keep the messaging up, and persuade the stubborn clients that they need to act
Verdict: There are too many small businesses that are nowhere near ready for MTD
There are more digital options available for small businesses now – MTD will force them to choose
Carl Reader, chairman of D&T chartered accountants and #BeYourOwnBoss founder
There are now a number of different software options to help businesses prepare, it’s not just Xero or QuickBooks anymore, it’s now expanded out with banks expanding into this space.
There are quite a few businesses who have done what’s needed, but there is still a huge tranche of businesses who simply haven’t sorted themselves out yet. The biggest challenge for the smaller businesses are the ones who have done things themselves in the past and filed their own tax returns, so this is going to be a lot tougher for them now.
Under company law, companies are obliged to keep proper accounting records. MTD will force a change in behaviour and business owners large and small need to be on top of their tax affairs day-to-day.
Next steps: Offer more options to clients in terms of the software available, and make it clear that this is a legal requirement
Verdict: Businesses aren’t ready, but more choice and the threat of non-compliance will get them there
The spirit is willing – but the knowledge is weak
Georgia Duffee, director, Benedetto Accounts and Tax
Small business behaviours, goals and desires are ready for Making Tax Digital. New businesses are utilising many new ways of running, from automation software to virtual meetings. The rise of fintech apps and cloud accounting software proves this.
However, are they prepared and clued up? Not yet. Many small business owners have no idea that they will need to submit a return to HMRC every three months. If they knew, they would act fast. They rely on accountants to pass on the message which doesn’t always get through to the small business community (especially if they submit their return themselves).
I will always let clients know about Making Tax Digital when I onboard them, this encourages the use of cloud accounting software from an early stage. My clients love knowing their tax liabilities quarterly and are now getting into the habit of saving for their taxes as they go. We use the Rhino Small Business App as they are specifically for small business owners so it is a simplified no-fuss app for my clients to use.
Next steps: I offer monthly or quarterly bookkeeping to the small business community just to calculate their quarterly tax bill estimate.
Verdict: Small businesses want to be more digital, but are completely unaware of the compliance need
David Nunn is Content Manager at AAT.