When Making Tax Digital is introduced in April 2019 small businesses will move from having to do one tax return a year to four ‘tax updates’. The government argues that this will save small businesses time and money. However, their estimate of how much Making Tax Digital will cost small businesses is massively different from those produced by small business and accountancy specialists.
| Making Tax Digital Cost for Businesses | Estimate |
| UK Government | £70 per year |
| The Institute of Chartered Accountants | £1,250 per year |
| The Association of Certified Chartered Accountants | £2,000 per year |
| Federation of Small Businesses | £2,770 per year |
Where does the government figure come from?
The government says that the Making Tax Digital cost to businesses will be £280 over 4 years, so £70 a year. This figure was approved by Jane Ellison MP who is the Financial Secretary to the Treasury. The estimate has been adopted into the government’s planning on Making Tax Digital and covers four areas:
- time spent in familiarising themselves with the new digital tools and quarterly submission of information
- purchase of new apps and upgrading existing software – this will depend on what free software is available from the market, and take-up
- purchase of new hardware or upgrade existing hardware
- additional accountancy/agents costs
As you can see their £280 Making Tax Digital cost (which they think will be a one off) can be broadly split into three areas. These are training, purchasing new software and apps, and ongoing accountancy support. So, let’s have a look at how much Making Tax Digital is really going to cost small businesses.
Getting Used to the Tools
The first part of the government’s estimate covers the training for businesses and individuals to learn how to use their new software and to learn about the new rules and procedures around Making Tax Digital. The Association of Certified Chartered Accountants have estimated that the process of getting small businesses setup and trained on Making Tax Digital will take 50 to 100 hours per business. Even if we take the lower figure of 50 hours, and assume a small business uses the whole of the £280 the government says all of Making Tax Digital will cost over 4 years, this works out at a rate of £5.60 per hour. That is £5.60 for the lost work the business could otherwise be doing, and to pay for detailed accountancy training and support. A more realistic figure for the lost work and professional training and support might be £25 per hour. This would give a cost of £1,250 for the initial training and setup. Not £280.
Purchasing new apps and upgrading software and hardware
The use of digital accountancy tools, apps and software is core to Making Tax Digital. All businesses will have to use this software to do daily bookkeeping and file their four ‘tax updates’ per year. The government make a lot of there being free software available for businesses to use but as yet the free software doesn’t exist.
Let’s assume for a minute that no new hardware is needed and focus instead on the apps and software. As we have said the free software the government mentions does not exist yet so businesses are going to have to buy something. The government has acknowledged businesses might have to buy some software but in their estimates they assume it will be a one off cost. The vast majority of the accountancy software currently available actually has a monthly or annual cost attached to it.
The government suggest that small businesses should start using receipt scanning apps to track their expenses. There is only really one provider of this software on the market and their packages range from £9.99 to £29.97 per month. Businesses will then also need some bookkeeping software from a provider like Kashflow, Xero or Sage. Their packages range from £10 to £20 per month. So, assuming a business goes for the mid-range option, the software alone is going to cost small businesses £360 per year. Not the £280 one off Making Tax Digital cost the government states.
Ongoing accountancy costs
The Association of Certified Chartered Accountants have estimated that small businesses will need 30 to 50 hours of accountancy support each year for Making Tax Digital. They put a cost on this of £2,000 per year while The Institute of Chartered Accountants estimate the cost of annual support from one of their members would be £1,250. It is worth saying again that the government’s cost of £280 for all of Making Tax Digital is a one off. They don’t think there will be any annual fees.
The government assume that moving businesses from doing 1 tax return per year to four ‘tax updates’ will mean they need less time with an accountant not more. They think that businesses will be happy to submit all of their sales, expense and tax information to HMRC without any help or assistance from an accountant. The reality is that most small businesses and self employed individuals are not going to have the time or the expertise to do this accurately. Our experience providing online accountancy solutions to small businesses reflects what the accountancy bodies are saying. Most small businesses will need to pay for more support time with an accountant to meet their obligations.
What is the total Making Tax Digital cost?
We still don’t know some of the detail of exactly how Making Tax Digital will work so we can only guess, but the figures put forward by the Federation of Small Businesses and the Accountancy bodies seems like fair estimates. This means an additional cost to all small businesses of between £1,250 and £2,770 per year. This is going to be a significant hit for small businesses, self employed people and the government.
The government claim that Making Tax Digital will have a net benefit to the Exchequer of £945 million by 2020/2021 but it appears they did not include the cost to businesses in software and accountancy fees when they worked this out. Because Making Tax Digital will mean businesses have higher costs they will have less profit and will therefore pay less tax. A rough calculation done by Jacob Rees-Mogg, who sits on the treasury select committee, is that the Making Tax Digital will result in £2.8 billion less tax being collected. This more than wipes out the £945 million the government think they are going to gain and making the whole exercise a costly waste of time.
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Further Reading:
The government’s policy paper (updated January 2017) which outlines the savings to government and the Making Tax Digital costs as signed off by Jane Ellison MP – https://www.gov.uk/government/publications/digital-reporting-and-record-keeping-for-business-income-tax/making-tax-digital-for-business
Latest Treasury select committee report which includes estimates of the Making Tax Digital cost to small businesses from the accountancy bodies and discussion on the tax take – https://www.publications.parliament.uk/pa/cm201617/cmselect/cmtreasy/927/92706.htm#_idTextAnchor020