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MTD VAT: fully compatible or bridging software?

Article

Published: 09 Feb 2022 Update History

Research commissioned by HMRC reveals that businesses choosing fully compatible software for Making Tax Digital for VAT are more likely to experience benefits.

HMRC commissioned Kantar Public to undertake a follow-up piece of qualitative research to understand the ongoing impact of Making Tax Digital for VAT (MTD VAT), in the second year of mandation for businesses with turnover exceeding the VAT threshold. The research focused on small businesses (fewer than 30 employees and an annual turnover of less than £10m) and involved 60 in-depth interviews with individuals responsible for fulfilling the business’s VAT obligations.

Research findings

It concluded that businesses’ ongoing experiences of the costs and benefits of MTD VAT varied considerably, reflecting variations in their financial requirements and receptiveness to change. 

Businesses using fully compatible software typically experienced ongoing benefits that outweighed the costs. Businesses using bridging software typically experienced minimal benefits.

Participants using fully compatible software identified benefits of MTD VAT including reduced scope for error, saved time, increased VAT confidence, and greater financial confidence, insight and control. These benefits in turn resulted in reduced emotional stress and anxiety.

Users of fully compatible software had a spectrum of views about the impact of MTD VAT:

  • those who felt the benefits outweighed the costs tended to be more focused on growth, at an earlier stage in the business life cycle and more able to adapt to change;
  • participants who felt neutral about the costs and benefits of MTD VAT tended to have already been using accounting software and experienced a minor change;
  • participants who felt the costs outweighed the benefits were similar to bridging software users in terms of having simple financial requirements; and
  • those who reported that they may realise benefits as more time passes and as business activities adapt following COVID-19.

ICAEW comments

As mentioned in the report, bridging software has been welcomed. It allows businesses to avoid having to spend significant sums on fully compatible software and, in many cases, allows them to continue to use legacy software that would otherwise need to be upgraded or replaced. 

However, it does appear that in the longer term some businesses would benefit from switching to a fully functional software product, but that would be likely in any event.

Software for MTD income tax self assessment (MTD ITSA) will be considerably more complex and will involve more two-way exchange of information with HMRC systems and the choice between fully functional and bridging products could be even more critical.

In some cases, the best option for MTD may be to adopt an inexpensive solution in the short term that ensures a business is compliant. In the medium to longer term, the organisation could then reconsider the options as part of an overall review of business systems and processes at a suitable opportunity, so that any solution is based first and foremost on the needs of the business.

Businesses that will be joining MTD VAT from April 2022 and MTD ITSA from April 2024 should ask software developers about their plans for a product that will satisfy both sets of requirements in due course.

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