It's been more than 10 months since Making Tax Digital (MTD) kicked in for VAT-registered businesses, and research suggests that it's been far from plain sailing for those involved in the transition.

UK businesses with an annual taxable turnover of more than £85,000 began to be ushered into MTD for VAT, which requires them to keep and submit digital records, from 1 April 2019.

The last VAT-registered firms, those with more complex accounts, joined the scheme from 1 October 2019, while some businesses not registered for VAT opted into MTD ahead of wider rollout at an unspecified future date.

Despite the Government previously indicating that the scheme had been a success, with 94% of firms meeting their new obligations in the first two quarters of 2019/20, a new study suggests quite the contrary.

Joint research from the Chartered Institute of Taxation (CIOT) and the Association of Taxation Technicians (ATT) polled 1,091 VAT-registered firms late last year to gauge MTD's success.

Reduced errors?

Only 10% of respondents felt that MTD for VAT had reduced errors within their businesses since they joined the scheme, and 64% said it had made little or no difference to their business.

Worryingly, especially given the Government's future plans to extend MTD for income tax and corporation tax, is that 15% of firms said mistakes with filing their VAT returns had increased since being mandated.

More than 70% of respondents said that MTD for VAT had little impact on errors made with recording and filing their VAT returns whether or a monthly or quarterly basis.

Increased costs?

Prior to last April, HMRC estimated the average cost for each VAT-registered business to move onto MTD-compatible software was somewhere around £109. That was the reality for just 8% of those polled, who spent an average of £43 a year complying with MTD for VAT.

Almost half (45%) of respondents said their costs of implementing MTD in their business to be somewhere between £109 and £500, while 12% of respondents claimed to have spent more than £5,000.

"Additional, costly obligations"

Tina Riches, chair of the joint-CIOT and ATT digitalisation committee, said:

"Far from bringing benefits to businesses and the Exchequer, MTD for VAT has so far created additional, costly obligations for most businesses beyond what was predicted by HMRC.

"There is a very long way to go to achieve the benefits claimed by the Government about MTD for VAT.

"The Government should undertake a detailed review of MTD for VAT, and determine any benefits, before rolling out MTD more widely.

"Appropriate software can, when used properly and in accordance with a business's needs, deliver significant benefits.

"But our survey demonstrates that MTD is not currently delivering those benefits to businesses, nor likely to reduce the tax gap."

What happens next?

MTD isn't going away anytime soon. Even your unique taxpayer reference is part of the early stages of digitising the way HMRC collects all forms of tax through the current self-assessment system.

Calls for a thorough review and further consultation before extending the scope of MTD is possible, but seems unlikely while the Government puts a positive spin on HMRC's high levels of compliance statistics.

Self-assessment itself is expected to go the same way as MTD for VAT, and it's possible a concrete date for this - or for corporation tax - could be included in next month's Spring Budget announcement.

Talk to us about Making Tax Digital.