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Poll finds many small firms think MTD does not apply to them

21 June 2022

A new HMRC study has found that while awareness of Making Tax Digital is fairly high among VAT-registered firms, there is widespread confusion about specific requirements and many businesses don't think the rules apply to them.

Under Making Tax Digital (MTD), from April 2022 all VAT-registered businesses, including those with an annual taxable turnover below the £85,000 VAT threshold, are required to keep business records digitally and use Making Tax Digital compatible software to submit their VAT returns.

However, government research, conducted by independent research agency Yonder on behalf of HMRC, has found that many small business owners are still not aware of their responsibilities. The researchers concluded that while general awareness of MTD was high, many small businesses "were not yet fully engaging with the requirements of Making Tax Digital".

Businesses were contacted at random, drawn from an HMRC database of VAT-registered businesses trading below the VAT threshold, who have only this year been required to comply with MTD VAT rules. The findings show that although 93% of businesses polled said they were aware of MTD VAT, over one-quarter incorrectly believed that MTD VAT did not apply to their business.

As recently as January 2022, researchers discovered that it was still not clear to many businesses exactly how Making Tax Digital would affect them. Despite the fact that all businesses polled would be required to use MTD compatible software in 2022, the findings show that many did not think the rules applied to them:

  • 36% said MTD would affect their business;
  • 29% said they were already compliant;
  • However, 28% said MTD would not affect their business;
  • And 7% did not know if they were affected or not.

While many businesses had started taking steps to comply at the time of the survey, a worrying number had yet to invest in the correct software. When asked what they had done to prepare:

  • 54% of small firms polled said they had researched MTD software;
  • 48% had started keeping digital records;
  • 46% had discussed the changes with their accountant and/or bookkeeper;
  • 21% had had a conversation with a software provider;
  • 18% had introduced training for staff;
  • However, only 17% had purchased a new accounting software package.

Understanding of the specific requirements of Making Tax Digital was even lower than general awareness. Only 51% of businesses aware of Making Tax Digital were able to recollect at least one correct requirement, 12% provided only incorrect responses and a further 37% could not think of any requirements at all (either correctly or incorrectly). Researchers contacted businesses in two waves (in June 2021 and again in December 2021/January 2022) and yet the position did not notably change despite an HMRC communication campaign.

The findings also show that the digital record-keeping processes of businesses remained consistent across the two waves of research, with 75% using digital methods as their main method for record keeping in wave two compared to 72% in wave one. In wave two, 20% of businesses were still using paper as their main method, a slight decrease from wave one (24%). The results also showed that businesses using paper methods were less likely to understand the requirements of Making Tax Digital.

Written by Rachel Miller.

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