SMEs forced into automation as Making Tax Digital goes live

With the roll-out of HM Revenue & Customs’ (HMRC) Making Tax Digital plan, thousands of small UK businesses are facing the realities of digital transformation as they are forced to sign up for the online tax collection system.

Making Tax Digital (MTD) is an umbrella term for a major digitisation of the UK tax system, which was introduced 1 April 2019 for VAT returns, with scope of automation ultimately expanding into main duties such as corporation and income tax.

HMRC describes MTD as a way to help businesses and individuals reduce errors leading to tax overpayment or underpayment. Once reports go fully digital, the new approach is intended to reduce tax evasion. Mistakes reportedly accounted for a £33bn “tax gap” in 2016-17, which is the difference between what the exchequer expected to receive and what was actually paid.

In this first stage, submitting returns through approved software is mandatory for VAT for all businesses with a taxable turnover of more than £85,000, while businesses will not be asked to keep digital records for other taxes until at least 2020.

The initial launch follows hordes of criticism around the project and the publication of a report by the Lords Economic Affairs Committee in November, which urged HMRC to delay the go-live date of the programme for at least a year as small businesses were unlikely to be ready by April 2019.

Under MTD, companies are no longer be able to complete paper-based VAT returns or submit returns online at the HMRC VAT portal, and will need to handle their record keeping and submissions using fully featured cloud-compliant systems.

As an alternative, Bridging Software is available for small businesses as a way to securely link HMRC systems with non-compliant systems such as Excel, while free software is also available for businesses with more straightforward tax affairs.

According to the tax authority, 1.2 million UK businesses will be mandated to join MTD. As the new rules went live, the tax authority announced that nearly 100,000 organisations – including agents and independent businesses – have already signed up.

At the current rate of 4,000 switching over a day, as reported by HMRC, less than half a million companies will have made the switch by August, when most quarterly VAT returns will be due.

Non-compliant businesses can be charged penalties of up to £500, but HMRC has expressed plans to adopt a light-touch approach in the first year of mandation by not issuing filing or record-keeping fines as firms try to comply with MTD.