As of April 2019, the vast majority of businesses registered for VAT, that have a taxable turnover above the threshold of £85,000, are required to keep digital VAT business records and send returns using Making Tax Digital (MTD) compatible software. In March 2020 however around 16% of businesses mandated to comply with MTD obligations from April 2019 had not done so. The ‘Exploring the barriers and enablers to becoming compliant with MTD for VAT’ paper details the conclusions drawn from the exploration in to the reasons behind non-compliance amongst mandated businesses. In addition, research tested messaging around enforcement and penalties to understand the type of messaging that could encourage non-compliant businesses to sign up to MTD for VAT.
The vast majority of businesses involved in the research were keen to comply with MTD for VAT and were often putting in considerable effort to comply, however they had come up against gaps in their knowledge and / or skills.
There appeared to be several factors driving gaps in businesses’ knowledge and skills, including:
- Misunderstanding the term ‘digital’ and ‘digital links’, taking it to mean simply online or even just ‘not on paper’
- Struggling to operate MTD compliant software
- Fears that transitioning from current accounts systems to new MTD compliant systems would mean a long adjustment period and would risk losing processes that suited their businesses
- Lacking one key piece of information that was stopping them becoming compliant
Some businesses lacked a sense of urgency towards signing up to MTD. In some cases, accountants played an active role in encouraging this complacency, suggesting that it would be best to put off compliance until the last minute or wait to see if HMRC offered their own solution as they did with PAYE. A lack of clarity or awareness around the HMRC deadlines also contributed to the lack of urgency around compliance.
Time and financial costs also turned out to be significant barriers to signing up to MTD. These included the following:
- Subscription fees of new MTD compliant software and/or the cost of updating their servers and systems to accommodate new software.
- Low awareness of cheaper and simpler software solutions.
- An assumption that signing up to MTD was a lengthy task and would divert time away from more business-critical priorities.
Statements from a reminder letter and email HMRC sent out to non-compliant businesses between July 2019 and February 2020, were read out during interviews to gauge recall of the letters and emails, and to explore reactions to what these reminders communicated. Recall of the letter and its contents was low and several could not recall receiving the letter or email at all.
Through exploring reactions to the message statements, two groups emerged amongst businesses in terms of their responses:
- Those who felt that the statements would inspire no action from them. These businesses often had misunderstood the term ‘digital’ and what was required of them to be compliant.
- Those for whom the statements would cause severe stress. These businesses were actively trying to sign up but were coming up against barriers such as lack of knowledge or skills.
New message statements were also explored in interviews. The messages aimed to encourage compliance with MTD. Similarly, to the reminder letter and email, two reactions emerged amongst businesses:
- Businesses who were more complacent about signing up to MTD felt that the messages needed to be less vague and ambiguous and convey a firmer more direct message.
- Those who were encountering barriers to signing up such as lack of knowledge found messaging too harsh and punitive. They wanted HMRC to offer and signpost more help and support.
For further information and to read the full findings report, please visit the GOV.UK website.
Ipsos MORI undertook 44 in-depth interviews with mandated businesses who were not yet Making Tax Digital-compliant. Fieldwork was conducted between 21 February and 20 March 2020.