“Two million businesses” at risk of fines ahead of MTD for VAT reforms

Up to two million small businesses are “at risk” of non-compliance ahead of the introduction of new Making Tax Digital (MTD) for VAT rules, it has been warned.

From 2022, almost all VAT-registered businesses will be required to use MTD for VAT to complete VAT returns regardless of income.

But the latest research suggests that a significant number of small and medium-sized enterprises (SMEs) are still using outdated paper-based methods to complete accounting tasks.

For example, more than a third (37 per cent) of small businesses use non-digital systems or “a collection of photos” to keep track of their finances, while one in 10 is using an “old shoebox” or drawer to store “essential documents”.

In addition, two in five business owners who store documents physically say they have failed to claim expenses in the past due to “lost receipts and invoices”.

The study comes ahead of major MTD for VAT reforms, which will require nearly all VAT-registered businesses to file and submit quarterly VAT returns using MTD-compliant software, such as Xero or QuickBooks, from 2022.

Under the current regulations, only businesses whose turnover exceeds the VAT threshold (£85,000) are required to use MTD for VAT.

Commenting on the study, author Lee Murphy said: “In this day and age, there are so many excellent digital record-keeping options available to business owners and freelancers that keeping paper or spreadsheet-based records should be a thing of the past.

“Records kept digitally will give SMEs a much clearer, accurate, and more up-to-date picture of their finances and tax owed, which is why HMRC is going to enforce it from next year.”

He added: “Our research shows that the new system is going to force millions of business owners to significantly change the way they keep their records, and if they are unfamiliar with procedures they could be at risk of fines once the new rules are in place.”

According to the study, more than half (53 per cent) of business owners were concerned about paying the incorrect amount of tax or VAT in 2020.

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