The rules are changing for 4.2 million taxpayers across the UK with all business owners, self-assessment workers and sole traders required to transition into the Making Tax Digital (MTD) scheme by April 2024. For VAT-registered businesses, the deadline to submit returns under the new MTD rules was on November 1, however, a new report last week found that 832,000 businesses still remain unregistered for MTD and could be facing penalties from being unable to submit their VAT return. This comes as the current economic pressures, alongside the long-term effects of the pandemic, severe delays within HMRC, and a string of changes to the tax system have wreaked havoc on the transition towards the digitisation of tax. There is a clear yet burgeoning gap on the awareness and knowledge around MTD, with a proprietary study commissioned by leading tax refund app, Tommys Tax, revealing that 45% of Brits still don’t know when the MTD deadline is and are not prepared for it.

As businesses find themselves under a mounting pile of financial pressures from the current climate, Tommy Mcnally, leading tax expert and CEO of Tommys Tax, is warning that the penalties for not complying with the MTD regulations could be significant – if not detrimental – for businesses and self-assessment workers across the nation. The clear gap in tax knowledge is already one of critical urgency, with the same study from Tommys Tax revealing that over a third (36%) of Brits state that tax is the one topic they understand least, while just over a quarter (26%) of the population haven’t even begun to think about their tax bill and are already struggling to make ends meet for basic necessities. As a result, a refund of any type could serve as a critical lifeline amidst the living squeeze.

The MTD scheme is set to provide a more cost-efficient method to process tax returns without the chance of human error – according to HMRC, this cost the Exchequer £8.5 billion from 2018-19. Not only that, the traditional processes for invoicing, filing and handling returns are often slow and laborious, meaning that the MTD scheme could decrease the number of penalties and regulations that businesses weren’t aware of in the first place – deposing of any issues that come with this such as reputational damage or a loss of sales.

VAT businesses turning over £85,000 have been required to submit VAT returns under MTD rules since 2019, but this was extended to all VAT-registered businesses this month. The next stage of this transition will be for reporting income tax in April 2024, when it will be compulsory for all self-employed businesses and individuals with property income whose turnover including any rental income exceeds £10,000. UK VAT registered businesses could face up to £1,600 in penalties per year if they do not file their returns using an MTD compatible software. Businesses could also face a penalty of between £5-15 a day for non-compliance which could become extremely costly for firms already struggling in the current climate.

Tommy Mcnally, CEO of leading tax-refund app, Tommys Tax, comments on the importance of educating the wider population about MTD:

“Although the Making Tax Digital scheme aims to make the tax return process easier across the board, the current climate has majorly disrupted the transition for many businesses. The continuous changes to the tax system – from September’s disastrous mini-Budget to last week’s Autumn Statement – have caused wait times to soar when contacting HMRC at a time when many have questions about the process. Because of this, business owners and sole traders are under mounting pressure to meet all the right requirements of MTD and avoid paying a hefty fine for non-compliance.

“The issue however is that there still is a huge knowledge gap when it comes to the tax process, and our research highlights this. With around £20 billion of unclaimed tax left on the table every year, a majority of taxpayers will be looking for rebates as an urgent lifeline to alleviate their financial strain – meaning that it’s more important than ever to stay well-informed in relation to the entire process and what this means for your taxes.”