It promises to remove tax headaches for thousands of business owners. So why are so many UK companies still in denial about Making Tax Digital?
In just a few years, all businesses in the UK will have to store their tax information digitally and submit regular updates to HMRC instead of in the traditional once-a-year tax return. It’s the ultimate aim of the government’s ambitious Making Tax Digital (MTD) strategy, which would see the biggest overhaul of the UK’s tax system in generations.
In fact, the first wave of digital tax has already kicked in for many businesses. On April 1st, the government launched MTD for VAT which requires any businesses with VAT-able sales above the VAT threshold to submit their quarterly returns digitally. This means that more than a million small businesses now need to file their first quarterly VAT return under MTD by August 7 or face a surcharge or penalty.
But despite being a major tax change that will affect a huge number of business owners, it’s alarming to see such poor awareness of the UK government’s flagship business tax regulations.
In March, my company FreeAgent commissioned OnePoll to survey 1,000 workers across the country in a bid to uncover attitudes toward Making Tax Digital.
The results are very concerning. Just a third of respondents said they had actually heard of Making Tax Digital – and only half of them said they understood it.
If those results carried over to business owners, which need to have changed the way they process VAT between April 1st and August 31st, many may be opening themselves up to HMRC recording a “default” and the risk of a possible fine.
Why is awareness of Making Tax Digital so low? Admittedly, digital finance may not be the most exotic of topics but our survey nevertheless uncovered a disconnect – whilst respondents were unlikely to engage with digital tax, they are already voraciously carrying out other financial dealings digitally.
Specifically, although 61% of respondents have embraced digital bank statements, 54% get digital phone bills, 55% have online energy bills and 29% get Council Tax documents online, only 19% said they processed their taxes digitally.
Why? Because, thus far, doing so has been complex. Tax doesn’t have to be taxing, as HMRC used to say – but, for too many, it still is.
Out of pocket
This is all a shame, because the changes Making Tax Digital ushers in – contrary to popular belief – are actually designed to make business owners’ lives easier, not more difficult.
Some businesses were concerned that the compulsion to make quarterly filings would quadruple their Income Tax burden. But HMRC is not asking for four tax returns – instead, it is asking for more lightweight information than that, which can be submitted via a range of easy-to-use software services.
More regular updates are not just good for HMRC, they are also good for business owners, because the requirement to record and a regular digital business snapshot is a good habit to have. For many self-employed people today, finance records still amount to an arcane shoebox of receipts and invoices, dumped on an accountant at year’s end. And when you don’t carry out regular checks, all the insights into cashflow and performance – insights that can help a business avoid the worst, make savings or capitalise on growth opportunities – stay locked up.
But, when you move to a digital system that you also feed with regular expense and sales data, you can better plan your business’s future. When it comes time to file – whether it be quarterly updates or a bigger annual submission – this can then happen with just the click of a button through HMRC-accredited, rather than the usual end-of-year anxiety and drowning in paper.
In fact, the ability, since last year, of most banks to provide such software with real-time transaction data makes such updates immediate and virtually automatic, giving people more time to focus on their businesses.
Getting it right
In the last few years, UK consumers have shown themselves to be voracious adopters of digital services. Such services have created efficiencies and led to big savings and transformations.
Now we need to ensure they feel motivated to seek out the same when it comes to their business taxes.
I am confident that, in five years’ time, businesses that have made the transition will be the ones leading the pack.