Smaller businesses to bear the brunt of MTD burden

Digital exclusion is a risk if the government presses ahead with its proposed mandatory digital tax compliance for businesses, according to research from the Institute of Chartered Accountants in England and Wales. 

 

Ahead of the consultation deadline for Making Tax Digital (MTD), the institute has compared the success and failure of global attempts to digitalise tax in Digitalisation of Tax, International Perspectives.

 

David Lyford-Smith, ICAEW technical manager, said: ‘The largest and most persistent issue in introducing the digitalisation of tax is that of digital exclusion, which is common among small businesses. Although government can work to educate and provide resources for many affected by digital exclusion, total compliance is impossible.’ 

 

He went on: ‘There must be an avenue for those who cannot comply with digital reporting to avoid penalties. This may be through the maintenance of traditional paper-based record-keeping and filing or supporting a network of accessible and affordable tax agents who can keep records and file on behalf of their clients.’

 

Mr Lyford-Smith added: ‘We have seen from other economies that forcing implementation in a short time can cause problems. The results of an ICAEW survey of businesses earlier this year showed that only 25% of UK businesses maintain electronic accounting records, so there is a huge amount to be done by businesses, HMRC and the software industry in very little time. 

 

 

Andrew Jackson, chair of the UK200Group tax panel, is also concerned about the burden MTD will have on small businesses because it will force them to start using accounting systems. He said: ‘If they do not have someone to input the data – who is aware of how things need to be done – they will have to get to a place where they have one. Often, that will be a bookkeeper who has never had to deal with taxation before.

 

‘HMRC officials think that getting small business to use accounting systems will reduce errors, and if people are making fewer errors they should have a more accurate idea of how their businesses are performing. However, they do not seem to appreciate why people are not using accounting systems at the moment.’ 

He said the reason was the cost of implementing an accounting system – not just financial, but also the time and effort learning how to use it.

 

Mr Jackson concluded that MTD would affect small businesses more than larger ones ‘because the overheads for setting up accountancy systems are going to remain broadly the same, regardless of turnover’.