Making Tax Digital: Challenge for small businesses (February 2022)


Ahead of the requirement for all VAT-registered business to adhere to Making Tax Digital (MTD) for VAT, a provision which comes into force on 1 April 2022, Alison Horner, Partner at MHA, says this will be the really hard part of the MTD transition as very small businesses and sole traders will struggle with time-consuming software training larger companies could just about handle, but there are solutions:

“A large number of UK sole traders and micro businesses are now in the firing line as HMRC pushes ahead with the digitalisation of tax. From 1 April 2022 Making Tax Digital (MTD) for VAT will be extended to those VAT-registered businesses with a turnover below £85,000. These firms will be required to register for MTD and to maintain digital records. For many the switch to digital tax will represent a demanding and time-consuming transition. Around 52% of UK registered VAT businesses are set to be affected by this*.

“Larger companies got away comparatively lightly with switching to MTD for VAT which started in April 2019. They could afford to either hire the staff with the right computer skills or provide the training for existing employees to handle the systems needed for this digital transition. Very small businesses do not have this luxury.

“However, worried businesses can use two relatively quick-fire solutions to buy more time. Firstly, for those not ready to take the leap to dedicated accounting software, Microsoft Excel spreadsheets coupled with bridging software, such as QuickBooks Online, can provide a simple, cost-effective and compliant way to submit VAT returns digitally to HMRC. Businesses can produce a ‘9-Box’ VAT return within the spreadsheet and upload this to the bridging software, which connects to HMRC and submits the VAT digitally. This provides a straightforward and cost-effective solution to overcome the challenges the digital switch poses for them.

“Secondly, exemption from MTD is also available, but only if a business can show that it is not reasonable or practical to use computers, software, or the internet to comply with MTD rules. Depending on the circumstances, it is definitely worth exploring this option even if a business plans to digitalise its tax affairs in the end. Most businesses will not qualify for an exemption though and will have to bite the bullet between now and April 1.

“In the end MTD will improve efficiency. The ultimate goal for businesses should be to view tax documents and information in real time, as opposed to accessing records months, or even years, after the event. Yet, implementation will in many cases prove an arduous process and depending on the circumstances buying time with bridging software or an exemption will make sense for many businesses.”

To discuss how you can implement Making Tax Digital effectively get in contact with our VAT team for advice by completing our online enquiry form