The new VAT system that no one has heard of

Many businesses are unaware of Making Tax Digital for VAT

The government is introducing a new digital system for VAT returns in just over six months’ time – and two fifths of the businesses affected have never heard of it.

Making Tax Digital is a computerised system which both individuals and businesses will be able to use to keep up to date with their tax – and it’s being brought in for VAT-registered businesses before being extended to everyone else.

Unless their registration is voluntary, VAT-registered businesses will be required to use the new system from April 1. But in a survey by the Institute of Chartered Accountants in England and Wales, 40 per cent said they were unaware of it.

Anita Monteith, the ICAEW’s technical tax manager, said: “Making Tax Digital is a major change in tax administration and we are concerned that based on these results, many businesses are not going to be ready for implementation.”

Under the new rules, businesses will have to keep digital VAT records and use accounting software compatible with the Making Tax Digital system to file their returns.

However, although more than 98 per cent of VAT-registered businesses already file electronic returns, only 54 per cent use accounting software. A quarter of all businesses still use a completely paper accounting system, including 13 per cent of those who’ll need to be using Making Tax Digital in April.

Some 15 per cent of businesses told the ICAEW they had already bought new accounting software, and another 20 per cent said they were planning to. 34 per cent said they would rely on their tax accountant or advisor to deal with the changes for them. However, 20 per cent said they hadn’t made any preparations.

“The lack of awareness among businesses is of concern and needs to be addressed,” Ms Monteith added.

“The communications do not appear to be getting through to VAT-registered businesses, and even among businesses that are aware of Making Tax Digital, many have not started to prepare to implement it. Given the need to review systems and potentially evaluate, purchase and test new software, this is a worry.”

One of the aims of Making Tax Digital is to reduce mistakes in tax returns, which cost the government more than £8 billion a year. In 2014 to 2015 more than £3.5 billion was lost due to mistakes in VAT returns alone.

The government explained: “Making Tax Digital will mean that people will not have to give HMRC information that it already has, or that it is able to get from elsewhere – for instance from employers, banks, building societies and other government departments.

“Digital tax accounts will mean customers can see the information that HMRC holds and be able to check at any time that their details are complete and correct.” So, for example, you should be able to know instantly how much tax you owe.

HMRC says it is working with more than 150 suppliers who will provide software in time for April. Around 40 already have software approved.