Adoption of Making Tax Digital (MTD): A Comprehensive Report

Making Tax Digital (MTD) holds significant importance in modernising tax systems. MTD’s primary significance lies in its ability to streamline tax processes, making them more efficient, accurate, and automated. Reducing manual data entry and paperwork saves valuable time and minimises potential errors, benefiting businesses and individuals. Moreover, MTD enhances compliance through real-time reporting and digital records, making it harder for tax evasion to go unnoticed, ultimately creating a fairer tax system. It also promotes transparency, fostering trust between taxpayers and tax authorities.

This report provides an in-depth analysis of the adoption and impact of MTD, exploring its objectives, benefits, challenges, and the current state of implementation. Continue reading and learn more about Making Tax Digital adoption.

Executive Summary

As countries worldwide embrace digital tax systems, MTD becomes crucial for businesses with international operations to remain compliant. MTD in the UK is no longer just an option; it’s a requirement for many companies. To VAT-registered firms, it’s mandatory to submit their VAT returns digitally through MTD-compatible software. Additionally, for those under MTD for Income Tax, including self-employed individuals and landlords with turnovers above the VAT threshold, keeping digital records and filing quarterly summaries is a legal obligation. Compliance with MTD is an integral part of the tax landscape in the UK, necessitating businesses to embrace digital tools to fulfil their tax obligations accurately and on time.

Introduction: What’s Making Tax Digital?

Introduced by Her Majesty’s Revenue and Customs (HMRC) in 2019, The Making Tax Digital (MTD) has the primary goal of simplifying tax compliance and reducing errors through the use of digital technology. The initiative requires all VAT-registered businesses to keep VAT records digitally and file their VAT returns using MTD-compatible software.

From 1 April 2019, all VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) must digitally keep their VAT business records and send their VAT returns using MTD-compatible software.

From April 2019, software that prepares a VAT return to send to HMRC must be MTD-compatible. This means it can integrate with HMRC systems to send VAT returns to HMRC via the application programmers interface (API).

From April 2020, data must be exchanged digitally between all software used by a business for VAT. The information contained within the MTD VAT return will be generated by pulling information from the digital records. This information will be the 9 boxes required for the VAT return.

From November 2022, all businesses who have not registered for MTD have been signing up to MTD automatically unless they are exempt or have applied for exemption. With this latest information, businesses must use MTD-compatible software to keep their VAT records and file their VAT returns. For further information, visit the HMRC site.

Objectives

The key objectives of MTD are as follows:

Simplify Tax Compliance: Streamline the process of reporting income, expenses, and tax liabilities.
Reduce Errors: Minimise the occurrence of mistakes in tax calculations and submissions.
Improve Efficiency: Enhance the efficiency of tax administration and reduce the administrative burden.
Increase Revenue Collection: Improve the accuracy of tax collections and reduce tax evasion.

Benefits

Millions of businesses are already banking, paying bills, and interacting with their customers or suppliers online, and many are already using accounting software. The move to digital integration eliminates many paper-based processes, allowing businesses to devote more time and attention to maximising business opportunities, encouraging growth, and fostering good financial planning.

By making it easier to get things right, digital record keeping will reduce the risk of unwelcome and costly HMRC compliance interventions and help businesses manage their cash flow more effectively.

MTD aims to help businesses get their taxes right the first time by reducing errors, making it easier for them to manage their tax affairs by going digital, and consequently allowing them to grow. It can help businesses minimise administration workload and free up time to grow their business.

The key benefits of MTD:

VAT returns are submitted more quickly
Up-to-date picture of the business finances
Digital confidence in record keeping
More accurate records

87.9% of Businesses said they were ‘prepared’ for MTD

In the UK, the Administrative Burdens Advisory Board (Tell ABAB) conducted research revealing the impact of the MTD on businesses. Businesses that participated in the research were asked to rate their experience of MTD. According to the Tell ABAB Report, Of the respondents who are businesses, 75% were VAT registered. Overall, for VAT registered businesses, the great majority of respondents felt that they were ‘prepared’ for MTD, with only 16.1% saying they felt unprepared. 25.1% said they were ‘very prepared’ and 62.8% said they were ‘prepared’ and ‘somewhat prepared’.

50.8% of Businesses say MTD is “easy/very easy to use” or “not difficult”

Most businesses think MTD is either easy or not difficult to use. Those 27.8% of respondents answered ‘easy to use’ or ‘very easy to use’, and 23% answered ‘neither easy nor difficult’ when asked how businesses felt about MTD software. Only 9.9% answered ‘difficult’ or ‘very difficult’.

Challenges

Implementing MTD for businesses can pose challenges, primarily because it requires organisations to adapt to new digital systems and processes. Many businesses, especially small ones, struggle with the initial cost and resource requirements to transition to digital record-keeping and reporting.

Additionally, concerns about data security, compliance with new regulations, and the learning curve for businesses and their staff can be significantly challenging during the MTD adoption process.

Initial Implementation Costs: Some businesses might face challenges in upgrading their systems and software to comply with MTD, especially smaller enterprises with limited resources.
Education and Training: Taxpayers needed training and support to adapt to the new digital requirements.
Technical Issues: Technical glitches and software compatibility issues can be challenging. The MTD regulations and requirements can be complex, especially for businesses with multiple income streams or complicated tax arrangements.
Security Concerns: Storing financial data digitally raises concerns about data security and the potential for cyberattacks or data breaches. Ensuring robust cybersecurity measures is crucial.
Resistance to Change: Some businesses may resist the transition to digital record-keeping due to a preference for traditional methods or concerns about data privacy.

12.9% of Businesses reported a reduction in time spent

According to the Tell ABAB report, 12.9% of businesses stated that MTD saved them time on tax processes. Of those, 4.2% said MTD significantly reported a reduction in time, and 8.7% reported a slight decrease in time. However, 37.4% did not answer the question, 25.3% said there was no significant impact on time, and only 24.3% responded that there was an increase in time spent.

26% said “No significant effect on costs,” while 34.5% said “Some increase on costs.”

Although most businesses that participated in the research did not answer the question (36.4%), some businesses say that MTD increased their costs. Of those who responded to the question, 34.5% said there was some cost increase. 26% said there was No significant effect on costs, and 3.2% reported a reduction in cost.

Addressing these challenges effectively is essential to ensure a smooth transition to MTD and maximise its benefits for taxpayers and tax authorities. Businesses are mandated to use MTD-compliant software, and selecting comprehensive accounting software that aligns with MTD requirements can help them effectively navigate and overcome the associated challenges.

Conclusion

Making Tax Digital represents a significant shift in tax compliance, emphasising the importance of digital record-keeping and electronic submissions. While there have been challenges, the overall benefits of accuracy, efficiency, and revenue collection are substantial. As MTD continues to evolve, it is poised to play a crucial role in the future of tax administration in the United Kingdom.

According to the Tell ABAB Report, Although it is good to know that most businesses were ready for the MTD, it shows that some companies needed to get the desired efficiency in terms of time and costs. Therefore, this shows the importance of choosing among the software to benefit from MTD. Businesses need to evaluate their size, budget, and current technology while investing in accounting software. To be compliant with MTD, you can find software listed on the gov.uk site.

Be Making Tax Digital Compliant with Zumzum Financials

A perfect example of software that makes Tax Digital VAT compliant is Zumzum Financials. Built 100% native on the Salesforce platform Zumzum Financials, designed for businesses of all sizes, to help you on your digital journey. Zumzum Financials is a recognised MTD for VAT-compliant solution that automatically calculates your VAT return (9 boxes) and makes it easy to submit your VAT return directly to HMRC.

– Create real-time dashboards and reports

Zumzum Financials stands out by offering tailored VAT dashboards that address the specific requirements of your business. With the capability to tailor your VAT dashboards, you can easily keep an eye on crucial financial metrics and extract valuable insights, simplifying the VAT management for your business.

– Create VAT returns and directly submit to HMRC

Setup and submit VAT Returns to HMRC via the Making Tax Digital Link. Zumzum Financials streamlines the VAT return process by allowing you to generate VAT returns effortlessly and submit them directly to HMRC, saving you time and ensuring compliance with ease.

– Real-time VAT Processes

Zumzum Financials provides you with real-time access to the latest information regarding your VAT processes and all other financial operations, ensuring that everyone in your organisation has access to the same up-to-date information, promoting transparency and collaboration.

To find out how Zumzum Financials can help your business with your Making Tax Digital for VAT journey. You can Install a free trial on Salesforce AppExchange now and get started. If you have any questions, Contact us to learn how we can help your MTD processes.