Making Tax Digital, the Government digital tax filing service, actually costs small businesses 50 per cent more to comply than those which have yet to migrate.
The Government said digital tax filing would mean it was easier for small businesses to simplify and “get their tax right” but the Federation of Small Businesses found the average £4,562 annual cost for participating businesses is considerably higher than for those yet to migrate (£2,960).
This is because enrolling in Making Tax Digital means subscribing to compatible software, the cost of which has significantly added to compliance costs, said the FSB. These costs may rise as the initiative is extended to the self-employed in 2024 and all companies paying corporation tax in 2026.
Seven in ten (70 per cent) of small businesses have switched to Making Tax Digital. Among them, a similar proportion (71 per cent) said that the move has resulted in increased costs and time lost to learning new processes.
The Government said going digital would improve the efficiency of the tax system, reduce errors and give businesses more control over their finances.
It has said the initiative will ultimately make it easier for companies and individuals to “keep on top of their affairs” and should result in productivity gains. It said the policy is “transforming tax administration”.
VAT-registered businesses with taxable turnover over £85,000 are required to follow the rules by keeping digital records and using software to submit their VAT returns, while VAT-registered businesses with a taxable turnover below the threshold will be required to join Making Tax Digital from April 2022.
Self-employed businesses and landlords with business or property income above £10,000 will need to follow digital filing rules for income tax from April 2024. The policy will not be extended to corporation tax until at least 2026.
Even those companies not yet within the grab of Making Tax Digital spend on average £4,100 and 52 hours a year on tax compliance.
This means that collectively small businesses are spending £25bn a year on tax compliance – a figure which does not factor in the 300m working hours spent on preparing and filing records.
Mike Cherry, national chairman of the FSB, said: “For many of those who’ve already taken the plunge, the programme has so far yielded higher costs and greater complexity.”