MTD Software Costing SMEs £564 on Average in Year One, Says FSB

New research from the Federation of Small Businesses (FSB) on the implementation of Making Tax Digital (MTD) reveals that on average, small firms are expecting to pay £564 on putting MTD-compliant software in place.

The cost and consequences of Making Tax Digital

The FSB’s survey found that half of VAT registered small firms required to comply with Making Tax Digital from 1 April do not currently have the right software to do so. While on average, small firms are expecting to pay £564 on one-off charges or subscriptions for MTD-compliant software in the first year, the cost is expected to be far higher for more successful or larger ‘small’ businesses. Companies with a turnover between £500,001 – £1 million are expecting the cost to be around £872, while for firms with a turnover of more than £1 million, that figure could be £1,019.

And it seems these businesses are paying out to support a tax scheme that few of them have faith in. More than a third (36%) believe the impact of MTD on their firms and clients will be negative and only one in ten small firms believe MTD will have a positive impact on tax reporting and financial management processes.

Unaware and unprepared

HMRC’s own research indicates that one in five (19%) firms needing to comply with MTD on 1 April have never heard of it, and the picture painted by the FSB’s research is no less worrying.

A surprising proportion of small businesses aren’t even using digital methods for their record-keeping. 37% use paper invoices, while 29% use paper receipts and bank statements to keep track of their finances.

Half of small businesses aren’t ready to comply with MTD requirements. 27% of the firms surveyed said they had not started preparing for MTD, while 23% have received quotes for MTD-compliant software but not purchased or subscribed to it yet. Only 3% said they had been part of the MTD pilot.

With the MTD rollout looming, FSB national chairman Mike Cherry said that small businesses are clearly not prepared for MTD and that despite the Government promising MTD compliance would be affordable, small businesses were now having to pay hundreds of pounds for software.

“At a time when small business confidence is in the doldrums – and wages, auto-enrolment contributions and business rates are rising – more costs and admin burdens are the last thing they need. They also have the small matter of Brexit to think about,” he said.

“Firms are finding it far more difficult, time-consuming and expensive to become compliant than was predicted by HMRC – not least because of a cumbersome registration process.”

In the Spring Statement, the Chancellor confirmed that the Government would be using “a light touch approach to penalties in the first year of implementation.”

In his written statement, the Chancellor said:

“Where businesses are doing their best to comply, no filing or record-keeping penalties will be issued. The focus will be on supporting businesses to transition and the government will therefore not be mandating MTD for any new taxes or businesses in 2020.”

Mike Cherry welcomed the news that small businesses wouldn’t be “punished for honest mistakes”, but said the Government should now rule out an extension of MTD to firms below the VAT threshold until the end of this parliament at the earliest, in 2022.

“A full review of the roll-out will be needed in the months ahead,” he added.

If you are one of those unprepared small businesses, you can read the full Government guidance (or pick relevant sections) on who needs to comply, when they need to comply, and how they can go about getting ready: Making Tax Digital: how VAT businesses and other VAT entities can get ready.

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