UK prepares to make VAT digital

Starting 1 April, more than 2 million UK businesses will have to start managing their value-added-tax (VAT) records and filings digitally, but many aren’t prepared for the switch, research by the British Chambers of Commerce (BCC) suggests.

The change has been in the works for more than a year, but a BCC poll of almost 1,000 businesses conducted in late January and early February found that 19% of affected businesses had never heard of the requirement or only knew it by name. A similar BCC poll in 2018 found that 24% of respondents had never heard of the switch and 66% knew it only by name or some details.

The HM Revenue and Customs’ Making Tax Digital policy, also known as MTD, requires businesses with revenue above the VAT threshold, £85,000 ($112,000), to maintain digital records for VAT and submit returns digitally. The switch requires MTD-compatible software to connect to HMRC systems and is the first step for businesses to manage all tax records and filings digitally.

A quarter of affected businesses still used manual or spreadsheet record-keeping in 2018. In the 2019 survey, more than one-third (38%) of firms said they upgraded or sourced new accounting software to meet MTD requirements. Cloud-based accounting software can cost more than £2,000 ($2,600) a year, according to the National Federation of Self Employed & Small Businesses.

A small group of affected businesses, including trusts, public corporations, and overseas traders, have until 1 October to comply with the MTD mandate on VAT.

The UK government expects to make tax collection easier with MTD, suggesting that digitising tax records and filings will allow businesses to have a clearer view of their tax calculations.

For many small firms, MTD is a big change. Tax experts have suggested using the new technology to automate existing processes or make them more efficient. Still, MTD is expected to increase administration efforts for most small firms.

Business groups, including the BCC, repeatedly asked for a delay of the MTD mandate, particularly because businesses had to prepare for it at the same time as they planned for potential effects of Britain’s leaving the EU.

In response to the requests, the British chancellor of the exchequer announced on 13 March that “the government can confirm a light touch approach to penalties in the first year of implementation. Where businesses are doing their best to comply, no filing or record-keeping penalties will be issued.”

The announcement added that the MTD mandate will not be expanded to other taxes in 2020 as previously planned.

Sabine Vollmer ( is an FM magazine senior editor.