On 23 March 2021 HMRC published the results of research carried out by an independent organisation into how Making Tax Digital (MTD) for VAT has affected small business, and to look at the costs and benefits of adopting MTD. The research focused particularly on small businesses with fewer than 30 employees and turnover below GBP 10 million which were participating in MTD. The research was conducted before the COVID-19 lockdowns began.

Under MTD businesses are required to submit records and file returns using MTD-compatible software. From April 2019, most VAT-registered businesses whose taxable turnover is above the GBP 85,000 VAT threshold are required to keep records in digital form and file their VAT returns based on their records using the appropriate software. Businesses that remain below the VAT threshold do not need to comply with these requirements but may participate in MTD voluntarily.

The research report notes that the small businesses surveyed considered the costs of participating in MTD to be greatest when beginning the transition, and the perception of costs decreased with time. The benefits of MTD began to appear with regular use of the compatible software. It was common for the small businesses to delay engagement with MTD until it was absolutely necessary, as they were apprehensive that the changes required would potentially overwhelm them in terms of time and expense. This was especially the case for small businesses previously using paper records and spreadsheets.

Costs incurred at the start of the process included time spent familiarising themselves with the required processes and time looking into the options for MTD-compatible software. Further costs were incurred by businesses in changing their systems, involving software costs, agents’ fees and the costs of upgrading IT systems.

Businesses that were new to the software needed to practice making submissions, incurring further time costs. Further accountancy fees were often incurred for help with checking the use of the software and for training users. The time of making the first submission to HMRC under MTD for VAT also brought costs in terms of extra time spent, depending on the extent of the change from their previous record-keeping method.

Ongoing costs associated with MTD for VAT included software subscription costs and ongoing intangible costs arising from concern to ensure the systems were operating correctly. Some businesses were also able to identify ongoing benefits, including quicker and easier preparation of VAT returns with the compatible software, increased tax confidence and improved business operations.

Some businesses that were already using software for their business records often only needed to instal minor upgrades were needed to become MTD compatible. Some small businesses benefitted from the nudge to adopt the software as they had grown too large for their old systems; and some businesses saw clear benefits from the increased facility to send out and track their invoices and payments.

The research indicates that HMRC could help to improve the attitude of small business to MTD for VAT by explaining clear reasons why the businesses need to move to MTD; educating them about the potential benefits of adopting MTD; clarifying that the benefits can apply to small businesses and not just to larger organisations; and providing support to the small businesses while they are adopting the new systems.