A half of VAT-registered small biz don't have the software needed to comply with the British government's digital tax reforms - due for launch next month - with each facing bills of almost £600 to bring it in.
HMRC is phasing in its Making Tax Digital (MTD) programme, which will require companies to keep digital records and file quarterly reports with the taxman, over the next few years.
The first part of the rollout is MTD for VAT, which is due to come into force for businesses with a yearly taxable turnover of more than £85,000 from 1 April 2019. It will affect about 1.2 million businesses, which will have to – among other things – update or buy new, compatible software.
However, a survey of about 750 VAT-registered small firms, carried out by the Federation of Small Businesses (FSB), found around a half don't have the right software in place.
Some 27 per cent have not yet started preparing for the changes, and a further 23 per cent have received quotes for software that will make them compliant but have still not purchased any.
Part of the problem has been the lack of products available; there are now about 220 listed on the government's Making Tax Digital pages but this was launched last July.
And there are far fewer providers out there for what is called "bridging software" – just 61 come up in this search – despite this being crucial for the many companies that still rely on spreadsheets, so they can link up with HMRC's systems.
FSB national chairman Mike Cherry said that firms were finding the process "far more difficult, time-consuming and expensive" than had been predicted, at a time when they also have to prepare for various Brexit scenarios.
The small businesses estimated that putting compliant software in place this year would cost on average £564, in the form of one-off charges or an annual subscription.
This is despite HMRC mooting that free software would be available to the smallest corporations – a move which has been criticised by peers, who said they questioned the logic of asking taxpayers to spend more money just to pay their tax.
In a document titled "Making Tax Digital Mythbusters" (PDF), published on Friday, HMRC said that there were 11 free products available, "with varying conditions of use".
For larger businesses, the costs will be higher: it is estimated those with turnovers between £500,001 and £1m will pay about £872, and those with turnovers of more than £1m will pay about £1,019.
Moreover, most businesses surveyed don't think the move will improve taxation issues – just one in 10 said it would have a positive impact on tax reporting and financial management processes, while 36 per cent believe it will have a negative effect.
The FSB urged UK Chancellor of the Exchequer Philip Hammond to recommit to a "light-touch enforcement" of the plans when he delivers this year's Spring Statement on Wednesday.
"We're only three weeks away from the rollout of MTD and small businesses are clearly not prepared for it," said Cherry.
"That being the case, the Chancellor must double down on his commitment to light-touch enforcement... Small business owners shouldn't be punished for honest mistakes, made more likely by a rushed HMRC rollout."
Cherry also called for a full review of the programme's guarantee that it won't be required of companies who fall below the VAT threshold until at least 2022.
HMRC has denied that businesses aren't aware of the programme, although it seems to have left its communications to the last minute. In response to a negative assessment from the House of Lords Economic Affairs Committee in November last year – which said 40 per cent hadn't heard about the rollout – the taxman said it had contacted 200,000 firms, which was far from the 1.2 million affected.
Last week's myth-busting document, though, claimed HMRC had written to every business by the end of February, and that more than 80 per cent of businesses had started to make preparations in December 2018.
An HMRC spokesman told The Register: "We are carefully monitoring the cost of software, working with providers to ensure requirements can be met for a sensible price. This means going digital shouldn't cost more than around £31 on average, with some providers offering free software and over 140 existing products being updated at no cost at all.
"Businesses are already preparing for MTD. Our research shows that in December, 8 in 10 of the businesses required to join were aware of MTD, and over 83 per cent of those aware had already started to prepare." ®