Is Making Tax Digital going to cost small businesses?

Making Tax Digital (MTD) will be with us in just a few months, and it looks like it’s going to cost small business owners – big time.

With the go-live date fast approaching, we’re finally starting to see finer details emerge from Westminster and understand the burden this new system could place on smaller businesses.

But I believe the people who lead our companies, and SMEs in particular, deserve more clarity from the Government. The question is: how do our politicians intend to safeguard owners from unnecessary financial pressure – especially in times like these?

That’s why I decided to get a clearer picture of the overall costs and crunch some numbers.

The price of modernisation

Under MTD, the key change for SMEs is that any company with a turnover over the VAT threshold (£85,000 per year) will be required, from 2019, to submit their VAT electronically.

While we were originally told that MTD would save businesses money thanks to improved efficiencies and reduced errors, now even HMRC is reportedly admitting there will be both an initial set up and an ongoing cost.

Today, I hear from my clients that they are worried about what MTD means, especially those who rely on legacy, low-tech solutions to report to HMRC and now need to invest in new IT. These businesses will also have to update to an approved software provider, which will charge a fee for this ‘new product’, as well as a subscription fee.

True cost of tax reporting

So, if we assume the actual cost of this ongoing subscription comes in at around £400 a year and compare that to the cost of submitting a set of accounts – say, £1,000 – then we’re looking at an increase in cost of about 400%.

Then there are the initial set-up costs. The Federation for Small Businesses told the Treasury Select Committee last year that the overall price of implementing new MTD reporting processes could cost a small business £2,770, on average.

These are loose estimates, but they show that there is a real danger that, far from introducing efficiencies and ‘taking the burden off’, MTD will put pressure on SMEs at a time when they already face great uncertainty.

Taxing takeaways on MTD

There will be benefits; businesses will have access to more regular and accurate management information, which will help them make informed, long-term decisions.

But, looking ahead, we will also see unincorporated businesses with a turnover of between £10,000-£85,000 a year required to join the MTD process the year after – and these costs will affect them, too.

So, over the next few weeks I’ll be talking to my clients about how this affects them, and how Haines Watts can help make reporting to HMRC less taxing.