Most of you will not know much if anything about Making Tax Digital (MTD) yet. You may have been told it will be “a digital service that enables small businesses to access everything they need to manage their tax affairs in a secure online space”, and if you’re anything like most of my clients, your understanding of this explanation is probably on par with your understanding of Esperanto.
HMRC seems perfectly happy to complicate life for small businesses because in my experience, their idea of how a small business operates is completely out of touch with reality. HMRC seem to think that all micro businesses have a competent bookkeeper, which in reality is the guise taken on by the proprietor on a Sunday evening. I don’t believe that keeping records is a problem for businesses, its finding the time that’s the issue.
Small business owners are naturally suspicious of any communication from HMRC. “I’m from the government, I’m here to help you” is the equivalent of “of course I’ll still love you tomorrow”. Even before we knew about “alternative facts” we knew something about false promises.
Whilst it’s true that many small businesses have trouble with record keeping, this translates in the mind of HMRC to meaning that they’ve understated their profits. My experience is that any such understatement is most likely due to confusion about what ranks as business expenditure, with more people not claiming what they’re entitled to for fear of making a mistake, outweighing by far errors in the other direction.
When will MTD come into effect?
MTD is being phased in from April 2018, with companies finally joining MTD in April 2020. Although there have been calls to delay the implementation of MTD (and indeed, a 12 months delay was announced in the Spring Budget), one thing is certain, MTD is coming!
Will anyone be exempt from MTD?
Yes, but not many; according to the Revenue’s plans, businesses and landlords with a turnover of less than £10,000 will not be obliged to produce quarterly reports or keep their record digitally. However, Philip Hammond has bowed to pressure and has now said that for at least the first year the exemption will be set at £85,000 (the current VAT threshold)
However, most businesses will still need to keep their tax records digitally and publish quarterly reports. The plan has been controversial, with critics arguing that the digital tax returns will be an unnecessary burden on business. Earlier this year, an ICAEW report found that 75% of businesses do not currently maintain their accounts electronically using accounting software. Following the publication of the consultation, ICAEW said today it was “dismayed” that making tax digital will still be compulsory for most small businesses.
What is MTD going to cost you?
The cost of MTD has previously been estimated by the various accounting and small business bodies, with estimates starting at HMRC’s own figure of £280p.a. up to nearly £3,000 per small business.
In giving evidence to the Treasury Select Committee in October about the potential costs and savings expected to be generated by MTD Mike Cherry, policy director of the Federation of Small Businesses, suggested that MTD would in fact cost most businesses £2,770.
Andrew Tyrie MP, chairman of the select committee, subsequently requested more information from both the Treasury and FSB for greater clarity and detail on the true likely costs of MTD.
He said: “The compliance cost estimates are so far apart that at least one of them must be wrong. I have written to both the Treasury and the Federation of Small Businesses to ask for detailed supporting methodology for their estimates. If the FSB are right, the effects of Making Tax Digital would be crippling for many small businesses.”
Seeking the truth About MTD Costs & Savings
Tax campaigner and City University Professor Richard Murphy has been seeking out the truth behind the figures quoted by HMRC around MTD costs and savings, including a Freedom of Information request for details of the computation and underlying data.
According to Murphy’s analysis, when software costs are stripped out of HMRC’s £170m estimate of the extra cost to business of MTD, £103m is left to cover the cost of quarterly updates from 5.9m businesses, which is the equivalent of £4.36 per update, a ridiculously low figure he suggested.
Using the national minimum wage as a benchmark, Murphy suggested HMRC estimate of £280p.a. costs only allowed 35 minutes to complete each update. “That is not plausible,” he said: “My research shows that the tasks involved in filing each update would take around half a day.”
Murphy has produced detailed estimates of what MTD will cost each small business, which are in the region of £300 per MTD return (5 of them!) plus an annual compliance cost of at least £300. Thus every unincorporated business will face an annual bill of at least £1,800, which is likely to double for limited companies.
When it comes to the huge variation of cost estimates, it is clear that the explanation for this is the lack of information and detail available from HMRC on exactly what MTD entails. I therefore strongly suspect that the Treasury Select Committee will eventually come out with a figure far closes to the FSB’s estimate than the paltry sum suggested by HMRC.
If you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.
David Jones is the Senior Partner and Founder of Morgan Jones & Company. Born in Liverpool and an Accountancy graduate of the University of Wolverhampton, David spent twenty years working for the Customs & Excise in London then Shrewsbury before starting his own business. David's depth of knowledge of the UK tax system and his ability to communicate this learning has seen Morgan Jones & Company grow into Shropshire's most respected Accountancy Practice.