UK businesses struggling to plan for Making Tax Digital deadline – reveals EY poll

19 September 2018

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  • Confidence in meeting MTD deadline stalls for UK businesses
  • Soft landing period is having an adverse impact on MTD readiness planning
  • Urgent need for tax and finance functions to raise awareness across their organisations of time and investment required to meet MTD deadline

According to a recent EY poll of over 1,300 tax professionals, including heads of VAT, tax and finance functions, the number of businesses that are very confident of meeting the Making Tax Digital (MTD) deadline has only marginally increased (from 4% to 6%) in the last three months. This is despite HMRC issuing more detailed guidance since June.

As concerning is that nearly 50% of respondents admitted they have not started planning for MTD and said they are either ‘only somewhat confident’ or ‘not confident’ that they will be ready for HMRC’s deadline for implementation on 1 April 2019.

By the 1 April, all businesses that are VAT registered with a turnover above the VAT registration threshold will have to store their records digitally (currently only for VAT purposes but it is intended that other taxes will come online) and provide their VAT return information to HMRC through MTD compatible software.

UK businesses face multiple challenges

Faced with multiple challenges of Brexit planning and the demands placed by many other international tax jurisdictions requiring digitized tax compliance, UK businesses are unsurprisingly struggling to juggle these change programmes, which is contributing to this stalling confidence and lack of planning.

Jamie Ratcliffe, EY’s Head of Indirect Tax in the UK, commented, “With less than seven months to go, it is a concern that a significant number of business are still failing to plan for the impending deadline. This reticence to plan is leading to a lack of confidence amongst businesses with a real risk of being non-compliant which could lead to penalties.

“However, given the number and importance of the challenges UK businesses are facing, including Brexit planning for March 2019, it is unsurprising that many are struggling to balance these multiple priorities.”

Lack of awareness of MTD is a big issue for businesses

When asked about levels of awareness of MTD in their own organisations and the April 2019 deadline, over 50% said that this was low and probably limited to those people who are involved in indirect tax or those directly responsible, with very little awareness at the C-suite level. Awareness of MTD has only marginally increased (10%) in the three months since EY’s last MTD webcast in June. This is a particular surprise, given the release of the public notice in July by HMRC, which provided further details of MTD VAT deadline and what is required to be compliant.

Fiona Campbell, Associate Partner in EY’s Indirect Tax team, warned that this could be a big issue given the time and budgetary resource needed to make the changes required.

“To ensure compliance, businesses need both the time and resources to invest in new, or even to upgrade, systems and processes. But to secure the backing and support of management to make the required investment, tax and finance teams often have to develop a strong business case to underline why this is vital,” she said.

“This is why awareness is so important – if management teams are unaware of the significance of MTD and making their businesses compliant, then building a strong enough business case to fund these changes is going to be a challenge.”

Will soft landing period help?

HMRC published a VAT Notice stating a ‘soft landing’ period for businesses to ensure they have ‘digital links between all parts of their functional compatible software’ in place. However, for the first year following the deadline, businesses will not be required to create digital links between VAT software programs.

HMRC’s intention was that this period should help businesses to adjust to the new system and resolve any technical complications without incurring penalties. However, the polling results from EY’s recent webcast indicate that the soft landing period is having an adverse impact on MTD readiness planning.

Nearly 20% of businesses polled said that the soft landing period has had a big impact on planning, so that they are effectively working towards the April 2020 deadline; and perhaps most surprisingly, 37% are not fully clear on what the period covers or the penalty implications.

Campbell adds, “The concern with the soft landing period is that it is lulling some businesses into a false sense of security. Business should not view the 2020 deadline extension as an opportunity to take their foot off the gas – they should still power ahead with implementing the necessary plans and investment to ensure they are compliant. The 12 months following the 2019 deadline is a useful period for businesses to invest in identifying the best possible solution for them, not a reason to delay.”

Businesses need to act now

Ratcliffe said, “Time on the MTD clock is ticking and as a firm we are urging tax and finance teams to provide focus and investment on this important area of tax compliance.

“One way to help fast track the process is to conduct a gap analysis that will reveal the areas where significant investment and process change are required in order to become compliant. This is the best way to determine how to proceed.”

Concluding, he said, “The UK is only one of many markets for businesses, and the majority of countries are already on their own roadmap of tax digitisation. Ensuring that a business’s strategy for dealing with MTD is aligned to their wider activities will save them time and effort in the long run. 

“Many of the businesses we talk to want to plan and invest in digital tax but would like clarity around HMRC’s longer term plans so they can make the wholesale changes to their systems with this end-game in mind.”