Just under a year ago, the government launched it’s Making Tax Digital program. The scheme meant that any businesses over the VAT threshold would have to give their finance systems a digital makeover, and submit their returns using approved software.
With the new tax year just around the corner, we spoke to Donna Torres, director of small businesses at Xero, about the performance of the Making Tax Digital scheme to date, and what small business owners can expect going forwards.
What have been the main challenges for SMEs in adapting the new digital tax rules over the past year?
Last year was particularly challenging for SMEs, with continued economic uncertainty hampering growth on top of ensuring they were adhering to the government’s new tax requirements.
The first deadline for quarterly Making Tax Digital for VAT submissions was 7th August 2019. Around 490,000 businesses should have completed their first quarterly digital VAT return then, but 10% of small businesses missed their first deadline according to the HMRC. This shows that the transition to digital tax wasn’t without its sticking points; for instance, some businesses found it difficult adapting to the new software.
Can the first year of the scheme be considered a success?
Making Tax Digital was designed to transform the UK tax system, aiming to make it more effective, efficient and easier to use. It benefits small businesses as it keeps all of your taxes in one place, giving you less paperwork to worry about. This gives you more time to put back into the running of your business.
It’s been a huge undertaking. Nearly a million businesses registered for MTD before the August deadline and 900,000 VAT returns were successfully submitted through the service. HMRC was lenient at first in imposing fines to enable businesses to get ready in good time. However, penalties will now occur for late submissions and will be point-based.
The rollout of digital tax has been challenging and to ensure that the software delivers the benefits it is capable of, it is likely that more training and support is required for businesses over the coming years. Our Making Tax Digital hub is full of useful information and resources, including how to make the switch to digital VAT returns.
Have SMEs found it difficult to adjust to the new technology requirements?
Businesses using cloud accounting software like Xero were able to transition to Making Tax Digital as part of their current plan, making it straightforward to become MTD-compliant.
But considering the fact that 10% of small businesses missed their first deadline, it’s clear that some SMEs have struggled with the new technology requirements.
However, as the soft landing period for penalties is coming to an end, there is no better time to get up to speed. It is always worth speaking to your accountant, as they will be able to guide you through the process and suggest the software that will work best for you. They may have even submitted on your behalf without your knowledge.
For small businesses who were operating in a low-tech system, do you think the digital requirement will have encouraged them to explore how to use technology more widely within their businesses?
Making Tax Digital is a great starting point for small businesses to explore the digital software available to them. If they are using Xero for MTD, this opens up new opportunities for growth. Xero integrates with over 800 apps through its marketplace, allowing businesses to easily make use of payment services like Transferwise or Stripe to help them to get paid faster and lending options like MarketFinance.
Where do we go from here, are there any challenges or considerations left for small businesses when it comes to MTD?
The UK is working towards becoming fully digital – and this includes all areas of tax. As part of this, at some point in the future it will implement these digital tax rules for income tax (which includes self-assessment and PAYE) and corporation tax. It’s worth keeping your eyes peeled for updates from the HMRC, and speaking to your accountant so they can let you know when these changes are likely to affect you.
What other areas of their financial operations should SMEs look to digitise next?
Our recent Business Rewired report found that 91% of SME owners think technology has greatly impacted their business routines in the past decade. Artificial intelligence and machine learning will play an integral role in digital transformation, and this technology is already equipping accountants and small businesses with powerful tools for growth.
AI-driven insights from cloud data for example can eliminate repetitive, manual and tedious tasks. Cloud software can also help small businesses by freeing up time spent chasing late payments. For instance, Xero allows you to include a ‘Pay Now’ option on invoices, ensuring that your customers can pay you instantly. This helps to make your business more efficient and improves cash flow.