By Gill Wadsworth | 15 Jul 2021

Government is ready with sanctions, but what can accountants do to encourage small businesses to embrace Making Tax Digital (MTD)?

One hundred thousand businesses that should already be complying with the Making Tax Digital (MTD) rules are yet to do so. While this means 90% of organisations are on the right side of the new regime, these stragglers face fines of £400, and HMRC is wasting no time to remind them of their obligations.

The tougher approach from the Government is designed to let businesses know that MTD is not going away, but this stringent stance needs to be accompanied by a concerted effort from accountants to convince their clients of the benefits of getting on board.

And get on board they must. The second wave of MTD is coming, which means From April next year, it applies to VAT for businesses with less than £85,000; from April 2023, it applies to income tax; and from 2026, MTD for corporation tax is expected to be mandatory.

Beyond Big Brother

Jesse Norman MP, financial secretary to the Treasury, told attendees at April's HMRC stakeholder conference: "We want this tax system that we are developing to be as user-friendly as possible, and we want the transition to be as smooth as possible."

But there is disquiet among businesses that the benefits of MTD are weighted in the Treasury's favour.

Daren Moore, Group Commercial Director at Tax Assist, speaks on behalf of many smaller firms: "In a lot of people's eyes, MTD creates another load of red tape. There is a 'Big Brother' feeling from smaller businesses that are worried about that level of involvement from HMRC."

However, financial secretary Norman says businesses that embrace IT tend to enjoy improved productivity and efficiency, which he says 'would be a very important goal'.

Norman adds: "[MTD has the] potential to provide other benefits for businesses in normal times. That might be better record keeping, it might be greater support for productivity improvements, it might be lower error rates, it might be prompts to their own business management practices."

While the arrival of MTD is inevitable, for businesses struggling to comply, there is some potential hope. Norman concluded his stakeholder speech by reassuring business that he is 'very much still in listening mode on this issue'.

However, now is the time for accountants to persuade clients that MTD cannot be ignored.

Carrot or stick

There are two approaches accountants can take in convincing clients to get on board with MTD: carrot or stick.

The stick, says Jamie Ratcliffe, indirect tax leader at EY, is quite clear; businesses will face fines if they fail to comply.

Ratcliffe says: "If you do not submit using the approved software, you could immediately receive an administration fine."

But that is not all. The second stick lies in HMRC's financial punishment for errors.

Ratcliffe continues: "If you submit a VAT return and there is an error in it, HMRC can apply a penalty, and these are applicable if you haven't taken reasonable care."

And it will be a challenge to claim that a business is doing all it can if it has refused to embrace the MTD regime.

Ratcliffe says: "Mistakes happen, but if you haven't followed the digital journey, it is difficult to argue you have taken reasonable care."

Meanwhile, the MTD carrots are plentiful and should make it easier for businesses to understand why they are being forced to go digital.

Ratcliffe returns to the frequency of mistakes and points out that HMRC makes them too.

"Mistakes can happen both ways," he says. "You can underpay tax, but you can [also] overpay it. Going digital could reduce overpayments which means better management of cash flow. From a governance control perspective, you should feel more confident in everything that you have submitted."

So long spreadsheets

Any business convinced that spreadsheets are digital enough is in for a shock since Ratcliffe says this approach to record-keeping is flawed.

He says: "HMRC went on record saying that trying to transition to MTD with a spreadsheet isn't going to give you all the benefit of the digital process, and it is not future proof your business going forward."

He adds that it will be difficult to capture the benefits of MTD using spreadsheets and suggests looking at more comprehensive digital solutions.

For accountants battling with clients who are either less willing or less tech-savvy, Moore notes that there are affordable digital offerings for all businesses. Still, professionals should be sympathetic to differing needs.

"You need to understand what MTD means to them, and it will mean different things to different businesses depending on their size and scale. And there is always a risk of 'head in the sand' with any change," he says.

Moore suggests that the sooner accountants help their clients get on board with the MTD, the better they will adapt and the more they will get from digital capability.

He says: "My advice would be to address [MTD] now. The next phase for income tax is two years away, but if you update your business processes and deal with it now when MTD is implemented, it will feel more natural and comfortable."

As Financial Secretary Norman says, MTD is about making life easier for everyone, not just the HMRC's bean counters. There is still time to convince clients of the ways in which digital processes can benefit them, but the sooner they start, the smoother it will be.

MTD Timeline

• April 2022. VAT-registered businesses with a taxable turnover below £85,000 will be required to follow Making Tax Digital rules for their first return starting on or after April 2022.
• April 2023. Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for MTD for Income Tax from their next accounting period starting on or after 6 April 2023.
• 2026? The Government plans a pilot for MTD for Corporation Tax, but it will mandate its usage before 2026 at the earliest.

Gill Wadsworth is AAT Comment's news writer.