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Businesses that do not use MTD for VAT make more errors than those that do, study reveals

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Businesses that do not use MTD for VAT make more errors than those that do, study reveals

Small and medium-sized enterprises (SMEs) that do not use Making Tax Digital (MTD) for VAT make more errors than those that do, a major study has revealed.

The research, published by HM Revenue & Customs (HMRC), comes before the introduction of MTD for VAT for all VAT-registered firms, regardless of income, this April.

According to the report, keeping paper records and submitting VAT returns manually results in “more errors”.

For example, three in five (61 per cent) businesses admit to losing paper receipts in the last year – receipts which would have been stored indefinitely if they had been uploaded and stored in the cloud.

Accounting errors are also costing taxpayers dearly. The latest statistics suggest that individuals who “failed to take reasonable care” when submitting tax returns were forced to spend an additional £6.7 billion on compliance in 2021, while avoidable mistakes cost businesses around £3.7 billion.

But HMRC says MTD for VAT – and soon Income Tax – is the answer.

As of December 2021, nearly 1.6 million taxpayers had joined MTD for VAT with more than 11 million returns successfully submitted using MTD-compliant software, such as Xero or QuickBooks.

In addition, seven in 10 (69 per cent) businesses reported experiencing at least one benefit from MTD, such as preparing and submitting returns faster and increased confidence that they were getting tax right.

A similar number (67 per cent) also felt that MTD had “reduced the potential for mistakes in at least one aspect of the record keeping, preparing and submitting returns process”.

MTD for VAT will become mandatory for all VAT-registered businesses, regardless of income, from 01 April this year. Under the current rules, only businesses with a taxable turnover above the VAT threshold (currently £85,000) are required to register.

MTD for Income Tax, meanwhile, will be introduced a year later than planned in the tax year beginning April 2024.

Commenting on the scheme, HMRC said: “There is Making Tax Digital-compatible software available for no or low cost for most businesses. Costs will differ from business to business, influenced by their size, complexity, and their degree of digital capability, but most will be able to claim any costs for hardware and software against their tax.”

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