Making Tax Digital: an expensive work in progress?

6 March 2020: implementation of Making Tax Digital for VAT (MTDV) has resulted in upshift in digitalisation of records, but increased costs for some practices and businesses, according to a survey of ICAEW practice firms. Anita Monteith reflects on the survey results.

ICAEW is urging the government and HMRC to review the implementation of MTDV before rolling out the initiative to any further taxes or taxpayer, following feedback from practice members.

MTDV became mandatory from 1 April 2019, requiring most VAT-registered businesses whose turnover exceeds the £85,000 VAT registration threshold to keep digital accounting records and file their VAT returns directly from these to HMRC.

Before MTD was mandated in April 2019, opinions were divided. To many its implementation looked like an expensive chore, the cost of which would fall on business. Many small firms in particular were ill-prepared, and ICAEW members in practice worried that much of the burden would rest with them.

Late last year, ICAEW commissioned an independent survey of practicing members on matters affecting their business and clients, including a section on MTDV. In November and December 2019, 500 small and medium-sized firms were selected for a telephone survey and some participated in a further qualitative discussion. This followed a similar survey undertaken in 2018.

The vast majority of ICAEW firms that took part (88%) do submit VAT returns for at least some clients and 91% of members in practice had found themselves advising on MTD in 2019, up from the 76% who were actively involved in 2018. Unsurprisingly, it seemed that as SME businesses took the opportunity to move to compatible software, the work of the adviser moved from merely raising awareness to more active participation.

Overall, there has been a significant climb up the rungs of the digitalisation ladder. Our research found a 79% increase in clients providing VAT records maintained using commercial software, while there was a 47% decrease in spreadsheet use and a 65% decrease in paper records.

While 73% of practices surveyed now see digitalisation as an opportunity, up from 46% in 2018, the bad news is that the cost has been significant – 22% of practices have seen their costs increase by more than 25%. While not measured in absolute terms, this represents a serious outlay and clearly the profession is now hoping for a period of consolidation.

The survey also confirmed that the move to digitalisation remains a work in progress. Most of those surveyed, 88%, still have some clients maintaining records using spreadsheets, while 73% have some keeping records on paper (so the agent does the bookkeeping). So there is some way to go before all is made digital.

The anticipated impact of MTD in 2020 shows 30% expecting a mainly positive impact while equally 31% expect no impact.

Quotes from members:

“Quite frankly MTD has been a pain.”
“It's difficult because it's new to us and it's new to them and it's a struggle to find the time because you can't just magic it out of thin air.”
“The positive aspect is that we've had more touch points with clients than we had previously and there has been more need for our services on a more regular basis.”

ICAEW comment:

ICAEW member effort to support the implementation of MTDV over the past year has been considerable, demonstrating the willingness of our members to embrace change. However, businesses and those representing them have suffered costs and the benefits have yet to be demonstrated.

HMRC, business and the profession have limited capacity to absorb change. ICAEW has consistently argued that the shift to digital should be gradual rather than mandated, allowing businesses to adopt digital when there is a business case for them doing so.

We are concerned that MTDV is not yet fully developed: for example, there is not a combined process to register for VAT and sign up to MTD. HMRC has also not yet fully developed its plan to ensure compliance by those who should have signed up but have not done so and those who may not be fully complying with the requirements to maintain digital records and to have digital links between different software products.

We would encourage the government and HMRC to review the implementation of MTDV before mandating any further taxes or taxpayers. Development and testing the system for MTD for income tax for self-employment and property income is still in its infancy, with very many fundamental issues still to be addressed.

We also suggest that HMRC reviews the more than 500 products that are available for MTD for VAT. We are concerned that some of these products do not have a long-term commercial future and some do not incorporate the full range of functionality.

MTD must be a proper road-tested marathon and not just a series of sprints.

HMRC response:

Jo Rowland, Director, MTD for Business Programme, says: “I welcome this survey, in particular the encouraging results around the benefits of digitisation. It is clear that ICAEW and its members have worked hard to prepare their clients and successfully land Making Tax Digital for VAT and I would like to take the opportunity to thank them.

“We are keen to explore areas where we can make improvements, especially in relation to software user support, and look forward to continuing to work closely together on developing the next steps of MTD.”

Method note

These research findings are drawn from a representative sample of 500 telephone survey interviews (CATI) conducted with ICAEW members from small and medium practices between 11th November- 9th December, 2019.

These interviews were carried out by IFF Research, an independent market research agency commissioned by ICAEW, who abide by the Market Research Society (MRS) Code of Conduct.
ICAEW is a company partner of the MRS.

For more information on MTD, visit ICAEW's Making Tax Digital resource hub.