What do small businesses want from Making Tax Digital?

FreeAgent reveals results of research with HMRC

With the rollout of the government’s Making Tax Digital (MTD) initiative set to begin in earnest in April 2018, award-winning cloud accounting software FreeAgent recently partnered with HMRC for the Making Tax Digital (MTD) public beta project.

Over two months, FreeAgent’s user experience (UX) team closely monitored 47 small businesses and freelancers from a variety of trades as they trialled FreeAgent’s accounting software to manage their finances. The participants’ feedback revealed that small businesses and freelancers want many of the same things from Making Tax Digital, including:

1. Relief from tax stress

HMRC has claimed that using digital tax software to make regular submissions will not only give participants clarity over their tax position, but will also encourage better accounting habits. FreeAgent found that many of the project’s participants were hopeful that this would be true:

“I hope it will make tax returns less onerous by working on things as I go rather than at the end of the year.” – Survey answer

“Curious to see if it saves time in the long run and hope to see how well or otherwise the business is doing as the year progresses rather than waiting for the year end.” – Survey answer.

2. More official information from HMRC

Throughout the project it became clear that many participants were becoming agitated by the lack of information from HMRC. In particular, participants were concerned about when MTD would come into effect, whether free accounting software would become available and how often payments would need to be made.

When asked at the end of the trial what their main concern about Making Tax Digital was, many responded with concerns about the quality and clarity of MTD guidance from HMRC:

“I think the risk is that it [MTD] will be made to look so complicated. To take me as an example, I freelance but mainly for one company. I have few if any outgoings, so it will take me a few moments to assemble the figures. By making it sound like a big thing, HMRC are scaring people who don’t need to be scared.” – Survey answer

“[What concerns me is] the lack of ANY clear information about what HMRC is expecting in the way of data that they can access.” – Survey answer

3. More certainty about the cost of transitioning to MTD

The cost to the taxpayer of changing from the current tax system to a new MTD system is currently being debated. HMRC claims that the transition, including all associated costs, will be “about £280 per business over the period 2017 to 2018 to 2020 to 2021”; however, the Federation of Small Businesses put this figure at £2,770 a year.

In FreeAgent’s research project, accountants and participants who use the services of a professional accountant expressed concern that taxpayers’ costs will significantly increase.

“A lot of my clients won’t do this themselves, they’ll want me to do it and this means it’s going to cost them, so their bill from me is suddenly going to skyrocket.” – Survey answer.

In addition, the majority of participants in FreeAgent’s research project (69%) felt that the nature of their accounts meant that they simply didn’t require the services of an accountant or accounting software:

“I’m not using an accountant because I’m such a small business and have a small turnover, so I don’t have to pay anything at the moment. It only costs me my time to do it.” – Survey answer.

Until there is clear information about what HMRC expects from small businesses, it seems that the uncertainty around cost may continue to be a source of unrest.

FreeAgent’s recommendations for HMRC

In light of these findings, FreeAgent has recommended that HMRC provides more information and clearer guidance on the requirements of MTD and the impact it will have on small businesses. A further recommendation is for HMRC to support these businesses in understanding how they can work with an accountant to mitigate their costs.

FreeAgent will continue to provide small businesses, contractors and their accountants with resources that help them get the most out of using software to manage their finances. The software provider’s comprehensive Making Tax Digital guide for small businesses is available for you to download and share with your clients.

*This blog post is adapted from an article originally published on FreeAgent’s website.