Will UK small businesses face a digital tax squeeze?
A UK government committee has thrown into doubt whether the country’s small businesses will be able to comply with new tax laws that come into force in April next year.
The Making Tax Digital initiative (MTD) is a large-scale reform of the tax system, one part of which will be mandated on April 1st, 2019: Making Tax Digital for VAT. VAT – value-added tax – is the country’s national sales tax, currently levied at 20 percent on applicable goods and services in the main, although there are reduced rates of 5 percent and zero-rated goods for specific commodities.
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Small businesses, defined as those with an annual turnover of more than £85,000 and less than £10 million, will have to file their VAT tax returns digitally, four times a year with HMRC (Her Majesty’s Revenue and Customs). At present, submissions can be on paper and are only submitted annually.
The House of Lords Economic Affairs Committee recommends that Making Tax Digital for VAT is delayed by at least a year, is implemented in stages, and the more significant proposed elements of the overarching MTD are postponed until at least 2022.
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Among its reasons, the Committee’s 3rd Report of Session 2017-19 [PDF] states that “as much as 40 percent of affected businesses have not heard of Making Tax Digital, let alone have started to prepare for a substantial change to their accounting processes.”
In the UK, over 95 percent of businesses are defined, in HMRC’s own terms, as “small,” so the possibility of widespread tax defaulting or errors in submission appear very likely if the government presses ahead with its plans.
The Federation of Small Businesses, the country’s representing trade body for the sector, states that 52 percent of income generated in the private sector derives from small businesses.
Companies will need to digitize their accounts on software that allows them to submit their figures online, and while those companies that have embraced digitization should have few problems, they are by no means the vast majority.
However, not only does the committee, therefore, undermine the government’s suggestion that the new requirements will reduce the number of errors in VAT payments – and thus increase HMRC’s revenues – but it states that “the emerging software market appears difficult to navigate.”
“It is not clear that older packages or specialist software will be updated to be compliant with Making Tax Digital for VAT in time for April 2019,” it says.
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The Report differentiates therefore between older platforms which will require what it terms ‘bridging software’ (an update, or major patch – which may or may not have to be paid for) and more modern solutions.
Neither HMRC nor any government-sanctioned body is planning to provide software for free, leaving it up to the accounting software industry and small businesses to work out what is necessary to comply with MTD for VAT between themselves.
But so-called ‘bridging software’ has not emerged, it transpires. For software suppliers, there is a more significant commercial impetus to pursue those businesses that are embracing digitization with new solutions, while those stuck with older software “may be less supported by the larger software providers, and so receive less training and support,” the Report states.
The Committee’s concerns for small businesses are that MTD for VAT will make life more difficult, given their scarcer resources, compared to the larger, enterprise-scale organizations which by dint of their scale already operate their finance functions digitally.
There remains, therefore, two large markets for digital software providers, irrespective of whether or not the UK government presses ahead with its proposed timescale. Firstly accountancy software that provides a platform from which the required quarterly VAT submissions to HMRC can be made, and secondly, software specifically designed for older systems that allow for mandatory submissions, but keeps existing software ticking along nicely.
30 March 2023