What Is Making Tax Digital For VAT: Exploring Voluntary Sign-Up
Updated: Oct 17
What Is Making Tax Digital For VAT: Exploring Voluntary Sign-Up
With its introduction in 2019, Making Tax Digital (MTD) For VAT was at first only mandatory for businesses over the VAT threshold. But many businesses under the VAT threshold signed up for it, although they were not yet legally required to do so.
What made them do this, and did their experiences with MTD meet their expectations? Would they be inclined to recommend voluntary sign-up to other businesses? HMRC wanted to better understand what had motivated these businesses to switch to a system that they were not mandated to use.
In research by HMRC, the reasons for the voluntary sign-ups were analysed, as well as the experience that these businesses had with Making Tax Digital For VAT.
Let’s take a look at the key findings of this research.
What Is Making Tax Digital For VAT?
Making Tax Digital For VAT (or MTD) is an initiative of the UK government to streamline the tax process. It entails switching over to a digital record-keeping and reporting system. The aim is to minimise reporting errors and make tax returns simpler and more efficient in this age of technology.
The Research Into Voluntary Sign-Up For MTD
HMRC has done several research studies into the issues surrounding the implementation of MTD. These studies have mostly delved into the benefits of MTD or the experiences of VAT-registered businesses who were obligated to implement it.
In this particular study, HMRC aimed to determine what value MTD offered voluntary users. The fieldwork for this research into voluntary sign-up was conducted in August and September of 2020.
The Research Aim
At the time of this research, an estimated 27% of smaller VAT-registered businesses had voluntarily signed up for MTD. This was encouraging, and HMRC aimed to explore their reasons for doing so. HMRC was also interested in these businesses’ perceptions and experiences of MTD for VAT.
The Research Structure & Sample
Thirty-eight in-depth telephonic interviews were conducted.
Businesses who had been signed up on a recommendation from their tax agencies were deliberately excluded. The focus instead was on those business owners who had decided for themselves to sign up for MTD for VAT voluntarily.
Key Research Findings
Below are the key findings of this research study.
1. Record-Keeping Before Making Tax Digital For VAT
Before switching to MTD for VAT, the businesses interviewed had used one of these systems to manage their financial reporting and recording for VAT:
2. Voluntary MTD For VAT Sign-Up Reasons
Most of the participants surveyed felt that the move to MTD was inevitable. And therefore, they saw signing up as a necessary step to take. They assumed that it must have benefits for HMRC, but were generally neutral about it at first.
A number of participants also admitted that they did not question the introduction of MTD when first hearing about it, and merely accepted it.
Their reasons for signing up voluntarily fell into a few common categories. They were as follows:
Unaware Of Voluntary Status
Although MTD for VAT was not mandatory for companies under the VAT threshold at first, some businesses claimed to have been unaware of this. Therefore, they voluntarily signed up, believing that they were legally required to do so.
Higher Turnover Expectations
Some of the businesses, although under the VAT threshold and therefore exempt at the time, had signed up because they expected to exceed this threshold. They believed their increase in revenue would move them over the VAT threshold and into the mandatory category.
Staying In Step With The Digital World
Companies who knew it was voluntary but did not expect to exceed the VAT threshold, cited that they wanted to stay in step with digital trends. MTD was seen as a process that was part of a wider move to digital interaction.
Those who already used MTD-compatible software commonly felt this way. But it was also true for users of non-compatible software.
Business owners who already used MTD-compatible software indicated that they felt MTD would be more efficient than their old systems. Because they were already comfortable with a digital approach to tax, they believed it would be beneficial to sign up for MTD.
The participants who had used MTD from the outset of their new venture felt that it was a logical decision as they would have to implement MTD further down the line anyway, thus, they decided to start using it right away in lieu of this.
Reduction In Errors
A small number of participants had signed up for MTD for VAT voluntarily, primarily to reduce errors and improve their VAT compliance.
3. MTD For VAT Awareness
Some participants were not able to recall when and where they had become aware of the transition to MTD for VAT. The consensus was that they must have been made aware of it in communications from HMRC, as some participants remembered receiving emails directly from HMRC.
Others recalled becoming aware of MTD from other sources. These sources varied from communications from their tax agents or organisations in their industry to news broadcasts. Also, those who had been using MTD-compatible software had been informed by the software provider.
4. MTD For VAT Experiences
The businesses who were already using MTD-compatible software found the experience of switching to MTD very simple. They did not report any difficulty with signing up, as their software made it easy to switch.
Those who were not using compatible software reported that they tended to stay with the same software provider. They did, however, investigate MTD-compatible options within that provider’s product line. Unfortunately, this was not always possible.
The reason for this was that certain providers did not offer software that was both MTD compatible and affordable. Research participants who had experienced this problem relied on other recommendations from agents, business contacts, or the HMRC software provider list.
5. Effect Of Switching To MTD For VAT
A large percentage of participants interviewed were neutral about the impact that voluntarily signing up for MTD had on their businesses.
This neutrality was common for new businesses who had used MTD from the start as well as those who’d already used MTD-compatible software. Because they did not have to make any major adjustments as to how they operated their financial reporting, they saw neither positive nor negative effects.
The most positive effect was experienced by companies who had changed to digital from other methods or who had upgraded their software.
They named real-time record-keeping, error reduction, and greater speed and efficiency the most positive aspects of their MTD experience. These participants saw the value of the voluntary sign-up as they had more positive experiences with MTD than with their prior bookkeeping processes.
Not all companies that had voluntarily signed up for MTD had positive experiences. Most of those who felt that switching to MTD had negative consequences, had not understood MTD well at the outset. They also named new software costs, quarterly record keeping, and time spent learning to use MTD as major drawbacks.
Another factor for the perceived negativity around MTD could be traced to those organisations that kept their paper-based systems and merely transcribed the data into the MTD model. This meant that there was a higher chance of potential errors occurring.
As HMRC had hailed MTD as a path to reduced errors and greater efficiency, such users were defeating the purpose of MTD and not realising the true benefits.
6. Recommendations To HMRC
Other than the participants who had experienced negativity following their voluntary sign-up to MTD, most participants were pleased with their decision. However, while they reported that MTD worked out well for them, they made a few suggestions for how HMRC could improve the transition.
A need for more guidance was highlighted. This was mostly related to deciding which accounting software to choose. This was particularly relevant to small businesses with very straightforward business practices. They suggested that HMRC should recommend software based on specific business needs.
Financial support was suggested for those who had to purchase software to implement MTD for VAT. Small and micro businesses often have stricter budgets and lower profit margins. This means that they have less money to allocate to new software for MTD.
More Information About Bridging Software
Not all users had upgraded to full MTD software, opting instead for bridging software to add to their existing systems. They reported that bridging software was sometimes very limited. These users felt that this should have been better explained by HMRC.
Direct Debit Payments
Some companies said that they would appreciate the option of paying their bills directly through their MTD software (with an option for automatic debit payments). They felt that this would make the move to more digital processes even more user-friendly.
7. Recommendations To Other Businesses
When asked what they would say to other businesses considering signing up for MTD, their answers were influenced by two factors. These were: their own experiences of MTD and the prospective MTD user’s record-keeping systems.
They were more inclined to recommend MTD to businesses using compatible software or who were digitally confident enough to transition from spreadsheets. They also noted that it was more sensible for new businesses to implement MTD from the start.
However, participants who’d had negative experiences with MTD weren’t likely to recommend voluntary sign-up. Instead, they suggested that businesses that did not yet have to sign up should wait until it was mandatory.
This negativity was mostly related to the cost of purchasing new software, and the time spent familiarising staff with the MTD process. If these issues were addressed by HMRC, they may feel differently about recommending MTD sign-up to others.
Take Away Thoughts From The Research Findings
“Necessity” Was The Driving Force Behind Voluntary Sign-Up
It is clear from the findings that when businesses voluntarily signed up for MTD, it was because they saw it as a necessity. Either they felt obliged, or they realised they would need to implement it shortly anyway. However, some businesses did so because they also expected greater efficiency with MTD for VAT.
New Businesses Were Neutral About MTD
On the whole, most of the voluntary users were neutral about their experience with the MTD implementation. This was especially true for new companies that had used MTD from the start. Those who didn't require a software upgrade also had neutral perceptions of MTD sign-up.
Digital Confidence Led To Positive Experiences With MTD
Those who had made changes to their accounting practices with new and improved fully MTD software had positive experiences. This was more common for businesses with a higher degree of digital confidence. They were the most likely to recommend MTD to other organisations.
Inadequate Understanding Of MTD Led To Negative Experiences
Negative perceptions were only typically experienced by users who had retained their old paper-based systems alongside MTD, or who struggled to understand the concept of MTD for VAT. They were the least likely to recommend MTD to other companies.
Most Voluntary MTD Users Were Satisfied But Had Suggestions For HMRC
In general, the voluntary users of MTD were satisfied with its performance. Certain recommendations were made to HMRC for making it more accessible.
These included support to choose and purchase MTD software, clearer information about bridging software and the addition of automatic payments through the MTD platform.
Even before signing up for MTD for VAT was mandated for businesses under the VAT threshold, almost a third of companies did so voluntarily.
According to the interviews conducted in HMRC’s research study, the findings were mostly neutral or positive, depending on the participants' prior financial accounting systems and their digital skills.
Their reasons for signing up voluntarily were influenced by needing to stay current in an increasingly digital world, as well as their desire for greater efficiency.
As these are the chief aims of HMRC’s MTD for the VAT system, the research seems to support that they are attaining their objective. It also highlighted the need for more education about transitioning to MTD for older businesses that are not digitally prepared.