Her Majesty's Revenue & Customs (HMRC) is transforming the tax system through Making Tax Digital (MTD), which aims to provide a modern digital experience for businesses. MTD for VAT requires VAT-registered businesses with a turnover of £85k or more to keep digital records and file their returns using software. These changes in record-keeping behaviour and the use of software to calculate and submit VAT returns are intended to reduce scope for error, which is expected to lead to additional tax revenue. The ‘Evaluating Making Tax Digital’s impact on record-keeping behaviour and scope for error among small businesses’ paper examined the behaviour changes that small businesses made, the impact of these changes on accuracy, and the reasons why small businesses made the changes they did.
Before the introduction of MTD, most of the businesses we interviewed had a highly manual approach to VAT submission. Records were stored physically or in spreadsheets, data and figures were entered into each step of the process by hand, calculations and checks were performed at the end of each month or quarter by hand, and the final VAT figures were entered into the government gateway website.
When MTD was introduced in April 2019, the small businesses we interviewed approached MTD in one of three ways
- Fully automated – these businesses kept digital records and had digital links between all steps of the VAT process
- Partially automated – these businesses also kept digital records and had digital links between almost all steps of the VAT process
- Using additional (bridging) software – these businesses tended to have a digital link only where it was absolutely required by MTD
We found that scope for error was most reduced among fully automated businesses:
- They had eliminated manual input errors and calculation errors because record-keeping and VAT calculations were carried out automatically by their software.
- They now kept records in real-time and carried out daily sense checks because they found automated processes to be quick and easy-to-use.
- They saved time by no longer having to perform thorough calculations and checks themselves because they felt confident that their software was accurate.
We also found that scope for error was reduced among partially automated businesses for the same reasons as fully automated businesses, except they were more sceptical of and less confident in their software. This meant that:
- They chose to keep some of the steps in the VAT process manual because they wanted to feel in control of the process.
- There were examples of businesses running both automated and manual calculations/checking at the same time because they wanted to make sure their software was accurate.
- The retention of manual processes meant there was still scope for error, and for those running multiple processes in parallel there was little time saved.
Finally, we found that scope for error was not much reduced overall among businesses using additional (bridging) software to make MTD-compliant submissions:
- They wanted to make as little change as possible to their VAT processes. For some this was due to lack of confidence in using software or the full functionality of their software, whilst others felt that the available software did not meet their business needs.
- Submitting VAT figures to HMRC via their bridging software eliminated the risk of input errors at this stage, but manual errors earlier in the process would not be caught and there were reports of some bridging software solutions being set up incorrectly which potentially increased scope for error. Therefore, the overall scope for error remained similar.
- They generally had a poor understanding of the purpose of MTD and, because they purposely wanted to make as little change as possible, they felt there was little time saving and increase in accuracy. This made them feel frustrated with MTD.
For further information and to read the full findings report, please visit GOV.UK.
Ipsos MORI undertook 60 in-depth interviews between September and November 2019 with small businesses.
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