Jason Piper examines HMRC’s research into which businesses will be receptive to MTD for Business, and which will be resistant.
On 14 January 2016, as a representative of ACCA I went to a meeting to discuss the government’s proposals for Making Tax Digital with the then Financial Secretary to the Treasury David Gauke and officials from HM Treasury and HMRC.
I took along a spreadsheet analysing the results of research HMRC had done into digital engagement, which mapped the conclusions onto the national statistics business population data. The figures were a bit rough and ready, but they contained some eye-catching highlights.
In particular, the proportion of taxpayers who regarded themselves as “digitally excluded”, whether by choice or circumstance, was significant, at around 800,000. Of those, fully 490,000 said they’d rather disengage from the tax system altogether than communicate digitally with government. So I was interested to read this research paper HMRC: Making Tax Digital for Business segmentation research which does a more scientific job of my initial estimate.
The report is based on a weighted survey of nearly 3,000 businesses turning over between £10,000 and £10m and with fewer than 20 employees. It identifies five broadly similar-sized groups of taxpayers, which are given labels ranging from most to least accepting of the changes: Embracing, Receptive, Tentative, Reluctant and Resistant.
As I did back in 2016, the research team extrapolates from their sample the expected overall size of each group across the UK economy as a whole.
One immediate warning sign for accountants is that the largest single group is the Resistant population – a majority of whom said they’d make no effort to implement MTD unless there were penalties.
HMRC estimates the overall size of this group at 1.1m businesses, with as many as 670,000 in the “prefer to pay penalties” category. That’s an even less optimistic overall picture than I had found. From the way HMRC structured their research we know that these businesses are the most likely group to rely on tax agents for help and advice.
Focus on VAT
With the start of MTD for VAT less than eight months away, we really need to know what shape the VAT-registered population is in. Around 40% of UK businesses are VAT registered, but only half those registrations are compulsory – just one million or so. All the voluntary business registrations are going to be in our target population from this research, as the 250,000 or so turning over more than £10m will all be subject to compulsory registration.
The initial survey work for this project was done back in September to November 2016, when we were still expecting mandatory income tax MTD reporting to apply from April 2018, and details of the MTD for VAT regime were totally unknown.
Although the research asked which taxes respondents were registered for, and their turnover relative to the VAT threshold, it didn’t ask whether the VAT registrations were voluntary. While we might estimate that around 60% of the 1.7m VAT-registered businesses would be exempt from MTD, as they are voluntarily VAT registered, we’ve no idea which 60% that is.
I looked at an earlier piece of research based on the same survey, released in December 2017, Making Tax Digital for Business: Survey of small businesses and landlords. One of the more surprising findings was that 5% of the respondents thought the only tax they were registered for was VAT. The researchers noted, “This is not technically possible, but findings are based on reported data from customers.”
That 5% of respondents isn’t recognised in the classifications in the current report, so I dug deeper and uncovered some other strange things.
The percentage of respondents declaring “turnover above the VAT threshold” suggests 1.7m businesses who should be compulsorily registered for VAT, but that’s also the number who report actually being VAT registered – leaving no room for voluntary registrations in the “below the threshold” population.
This suggests that as result of the weighting of respondents, effectively we are hearing more from compulsorily VAT-registered businesses, and have captured fewer voluntary registrants than should have been the case. For MTD preparations that’s probably less worrying than it being the other way around, but we still don’t know where the million or so of VAT-registered businesses who won’t need to implement MTD are sitting.
Are those businesses still VAT registered? A large number of businesses deregistered from VAT when the flat rate scheme was altered for limited cost traders from April 2017, which was after the survey data was collected.
Does this report help us specifically in planning for the MTD for VAT rollout?
It might help HMRC estimate its resourcing needs at a national level, and it may give the software companies some idea of what they can expect to contend with.
For accountants, the answer to that question is probably “no”. It’s almost certainly less use than your own knowledge of your clients.
About Jason Piper
Jason Piper works in the Professional Insights team of ACCA dealing with tax and business law matters. His policy and research interests cover all aspects of the design and implementation of tax systems and their interaction with business form and the wider economic environment.
He represents ACCA at a number of international expert groups on tax and business law matters, convened by the UK Government, the European Commission, Accountancy Europe, the European Association of Craft, Small and Medium Sized Enterprises (UEAPME) and the Business and Industry Advisory Committee to the OECD (BIAC).