At last week’s Business Barometer Breakfast event, IoD members were joined by the Director of Making Tax Digital (MTD), Theresa Middleton, and the Deputy Director of MTD at Her Majesty’s Revenue and Customs (HMRC), Clare Sheehan, to discuss how the upcoming changes will impact business leaders and what they should do to prepare.
From April 2019, VAT-registered firms with a taxable turnover above the £85,000 threshold will be required to keep digital VAT records and send returns through software that is MTD-compatible. The system is expected to be rolled out for Income Tax and Corporation Tax post-2020. Businesses can currently submit their Income Tax updates to HMRC via a testing pilot if they wish to do so.
The changes are part of HMRC’s aim to give businesses a more digital experience when dealing with tax and to reduce the tax gap that is caused by error. As much as £9.2bn of the total £33bn yearly tax gap in the UK is resulted from error and failure to take reasonable care. The department’s view is that this modernisation of the system can help close that gap.
The pilot for MTD for VAT has been running since April 2018 and over 60,000 businesses have joined the service since then, with 2,000 to 3,000 firms signing up daily. The testing phase aimed to identify any flaws in the system itself, as well as testing the support model, including the guidance that is available for companies to help them get on board.
A large majority of IoD members (70%) have said they will be affected by the HMRC’s MTD for VAT requirements. Of those, 80% are confident they will be fully compliant by 1 April 2019, while only 8% said they don’t feel confident they will be ready by next month. When asked about the biggest challenges they faced in ensuring that their organisation is prepared for the changes, over a third said there have been no challenges. Meanwhile, 19% cited time constraints and 16% lack of information.
In the Spring Statement, Chancellor Philip Hammond gave reassurances to business leaders that the Government would take a very much light-touch approach when it comes to penalties in the first year, which was reiterated by both Theresa and Clare during event. HMRC representatives pointed out that a wide range of guidance is available for business leaders to help them become compliant, including YouTube videos, webinars and guidance on gov.uk, and that demonstrating that a company is working towards becoming fully MTD-compliant can be sufficient for the first year. They also emphasised that 1 April 2019 is not a hard deadline - for example, if a business is submitting VAT returns every quarter, under the new rules it will need to comply with MTD for the period ending 30 June 2019, and each quarter thereafter.
These reassurances were welcomed by members in attendance, as a few of them raised concerns about unclear messaging of what ‘going digital’ actually means for businesses, as there are misconceptions that simply sending VAT data digitally covers it. However, if you’re already online, it doesn’t necessarily mean that you’re digital. In addition, if you’re already using software to keep business records, you need to ensure that it is MTD-compatible by checking with the provider. Concerns were also raised about software providers issuing inconsistent messages in relation to software upgrades. In light of this, it is crucial that HMRC continues to communicate with businesses in order to clear up some of the confusion and reiterates the light-touch approach that the department is taking in relation to these changes.
The Government’s website has information on software available for MTD for VAT, as well as Income Tax. HMRC itself does not and is not planning to provide free services for companies to become MTD-compliant. The reasons for that were discussed at the event, with Theresa saying that allowing the software industry to lead on this was a strategic decision the department made to encourage growth in the software market. They also seek to avoid doing things that are already being done by the private sector.
On MTD for Income Tax in particular, the Government has made a commitment that when it comes into place, the smallest companies would be able to access the software free of charge, which has been backed by the industry.
For more information, visit gov.uk/makingtaxdigital or get in touch with the IoD’s Information & Advisory Service.
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