A Lords sub-committee has taken evidence from experts on the digitisation of VAT returns by businesses with turnover above £85,000, which is due to begin in April 2019, and information provided by HMRC on the preparations they need to make
Appearing before the House of Lords finance bill sub-committee were Mike Cherry, national chairman of the Federation of Small Businesses (FSB), Sion Lewis, CEO of IRIS Software Group and Paul Morton, tax director at the Office of Tax Simplification (OTS).
The sub-committee was looking at how effectively HMRC has communicated with taxpayers and agents about MTD for VAT and the current preparedness of businesses for the roll-out of the program.
Lord Forsyth of Drumlean asked about the current state of preparations, to which Morton responded by referring to a limited survey of small businesses and their advisors, recently carried out by OTS, which suggests that 85% of agents understand what is required, and 25% of the smallest businesses have ‘some awareness’ of MTD and 70% of other businesses are aware.
‘Less than 30% of businesses are confident that they understand what is required and less than 15% of businesses say that they are prepared. Some people have commented that they will deregister from VAT if they registered voluntarily or reduce their activities in order to deregister if they were registered.’
Cherry noted that some businesses were yet to make preparations because of the timing of the roll-out. ‘If you are having to change your software…you would normally only do that at the end of a financial year’. He said that he was not confident that FSB members were prepared for MTD.
Lewis noted that ‘HMRC and the software companies recognised that many small businesses did not have software’ and to that end had produced ‘bridging software’ which allows the transfer of data from spreadsheets to the program. His biggest concern was that the average small and medium-sized enterprise (SME) ‘probably does not know about it and, with six months to go, we need to ensure that communications start in earnest, very quickly’.
Lord Forsyth questioned the concept of awareness in this context. He said that there was a distinct difference between awareness of MTD and awareness ‘that a bus is coming towards you’ and asked why businesses at least appeared to be unready for a process that was originally announced in the spring 2015 Budget.
Cherry said that there was a lack of available information: ‘We simply do not know what MTD is going to require. It is very easy to say it is only about your VAT, that is no the initial inference that HMRC stated, they said they wanted it to remove the year end tax - so is it all the detail, every quarter, which every business must do for a profit and loss account? There has been nothing out to our members on the software so far, on something that is simple and easy.’
The costs to businesses of complying with MTD was also raised. Cherry noted that the initial outlay of compliant software could also include subscription costs, upgrades, and man-hours:
‘It was March 2017 when the FSB engaged CEBR [Centre for Economics and Business Research] to do an independent review of our ideas on cost for MTD. At that particular time we did not again believe HMRC’s own estimate of the impact assessment and the cost, and we came up with a figure of around £2770 - that was based pure and simply on the time of the business owner and indeed some of their staff time.
‘That was further corroborated by them going back and looking at the figures in a slightly different way, and again it came out at well over £2000 - that was based purely on the time on the business time that would be required to comply with MTD.
‘In addition to that, the evidence we are now receiving is that there are cost increases on the software, either as an add-on module or other variations, of anything between £300 and £2000 for a business to update its software. That also presupposes that the hardware it has is compatible or indeed that it has computerised software to be able to submit and do what HMRC may require, when we know what we are supposed to be doing.’
The committee’s suggestion that accountants were not doing all they could to prepare their clients was rejected by the witnesses, with Lewis saying that it is only if HMRC moves ‘very quickly’ to give more guidance to small businesses that the system will succeed. ‘Timing is clearly tight and communication is critical at this stage’.
HMRC has been approached for comment.
Report by James Bunney