Lack of knowledge behind MTD non-compliance
Updated 9 July: Businesses failing to comply with MTD for VAT are hampered by a lack of skills and information, suggests HMRC commissioned research. Lack of urgency and concerns over costs are also factors.
MTD for VAT was introduced in April 2019, but the number of businesses signed up has plateaued with 16% of those mandated to comply failing to do so.
HMRC has published independent research providing an insight into the barriers to compliance and the impact of HMRC communications, which describes a lack of knowledge, skills and information as “frequent barriers”.
Researchers interviewed 44 non-compliant businesses in February and March this year about MTD for VAT, concluding: “The vast majority of businesses involved in the research were keen to comply with MTD for VAT and were often putting in considerable effort to comply, however, they had come up against gaps in their knowledge and/or skills or lacked key pieces of information needed to continue with their compliance journey.”
HMRC has recently restarted its compliance activity, writing to those businesses that have not yet signed up, however, the research findings suggest that this exercise may not be very effective in getting more businesses to sign up.
The research puts reasons for non-compliance into four categories:
1. Lack of knowledge, information and skills
Some businesses surveyed misunderstood what is meant by “digital” and “digital links” in the context of MTD – interpreting it as “online” and making the incorrect assumption that they were compliant because they file their VAT online through the HMRC portal. While other businesses were struggling to operate MTD software and could not find suitable help.
For some businesses it was the fear of the unknown that was holding them back – businesses that had not considered MTD compliant software because they thought that a new system will mean a long transition period and losing processes that suit their business. Meanwhile a fourth group of businesses were missing a key piece of information, such as whether to sign up as a group or individual businesses.
2. Lack of urgency
Some businesses surveyed lacked a sense of urgency towards becoming MTD compliant, choosing to put it off until the last minute because:
- they thought that HMRC might develop its own solution,
- other priorities, or
- a lack of clarity over the “real” deadline and when the “light touch” approach to penalties ends.
Rather surprisingly, some businesses said that their lack of urgency was based on advice from their accountant.
3. Time and cost
The perceived or actual time and cost involved in becoming compliant with MTD was a barrier for some. This was often associated with a lack of awareness of cheaper, simpler software solutions and an assumption that the work would divert attention from other business priorities.
4. Factors outside the taxpayer’s control
A few businesses encountered factors outside their control, such as illness, poor broadband connection or a technical issue with signing up on HMRC’s website.
HMRC communications ‘vague’ and ‘stressful’
The findings on HMRC’s communications are revealing. Many of the businesses surveyed could not recall receiving any letters or emails from HMRC encouraging them to sign up to MTD for VAT and those that could recall seeing them remembered very little about the content.
When prompted with statements from these communications the reactions fell into two groups:
- those who felt that the messages were vague, not personalised and generic and therefore not applicable to their business; and
- a second group for whom the communications would cause severe stress.
The researchers also explored new message statements and again there were two different reactions:
- Those who feel that the messages need to be less vague and ambiguous and convey a firmer more direct message; and
- Those who found the messaging harsh and punitive, and wanted HMRC to offer more help and support.
This demonstrates that communicating with those businesses that have not signed up to MTD for VAT is a significant challenge for HMRC. HMRC needs to balance the need for more direct communications to those that need prompting to take action with the need for more supportive communication for the many businesses that have tried to comply with MTD for VAT, but have encountered barriers. Of those surveyed, some of the latter group were compliant in the way that they maintain their records, but had not signed up to submit their returns from the software.
ICAEW's Tax Faculty notes: “HMRC has issued no communications about the penalties that apply for not complying with MTD. This information is not readily available on gov.uk, with the detail mostly buried away in HMRC’s manuals. Many accountants, as well as most taxpayers, are unfamiliar with the rules.”
The penalty for filing a return through the HMRC VAT portal rather than from software is £400. The general regulatory penalty which HMRC can levy for not complying with the record keeping requirements (including, from 1 April 2021, digital links between different pieces of software) is a maximum of £1,500. This penalty can only be charged following a warning letter and is calculated as follows:
- No previous failure within two years prior to the present failure – penalty rate of £5 per day.
- One such occasion in that period – penalty rate of £10 per day.
- In any other case – penalty rate of £15 per day.
- There is a minimum penalty of £50. The penalty rate is applied to the number of days a failure continues up to a maximum of 100 days.
The Tax Faculty says: “Penalties need to be well understood to be effective. The vague references to penalties in HMRC letters do not work to prompt those who have not taken action to comply or those that need support on their journey to compliance.”