Today, Rosie Forsyth from Wilkins & Co Chartered Accountants joins us for a guest post all about the government’s new digital tax system, and how best you can prepare your business for the new changes.
In 2015, the government announced major plans to modernise the tax system by introducing a digital system. This autumn, HMRC issued policy papers together with six consultations on how Making Tax Digital is supposedly going to revolutionise the tax system. It has to be said – the jury’s out!
So, who will it affect?
It will apply to a wide range of taxpayers from 2018, including most businesses, self-employed people, and landlords, as well as individual taxpayers. Currently only businesses and landlords with a turnover (not profit) of under £10,000 are exempt.
Once implemented, in theory you will be able to see a complete picture of your tax affairs, via your personal digital account. You will be able to use this to manage all of your liabilities at the same time and in the same place. It should mean that a significant number of taxpayers with straight forward tax affairs will no longer need to complete a tax return.
HMRC will collect and process information in real time and you’ll no longer have to wait until the end of the tax year to see how much you owe. Sounds great, but how are HMRC going to get the information?
How will it work?
Businesses will have to report figures quarterly to HMRC, making adjustments at the year-end for accounting and tax adjustments. Records will have to be kept digitally with the expectation that invoices, receipts etc. will be kept digitally through software, using apps and cameras to upload pdf’s. Some free software may be available online, but HMRC will not be providing its own free software to help you! That means, no more waiting to the year-end and handing over a shoebox of receipts to your accountant – HMRC need up-to-date information quarterly. When an update is due, businesses and landlords will have one month to compile the information and confirm to HMRC that it is complete. But don’t worry – they haven’t decided on the fines yet for late filing…but they will!
Although HMRC claims that the annual tax return will go, businesses will still need to prepare year-end accounts in order to reconcile their quarterly payments, claim various reliefs and make accounting adjustments.
They will be required to file a year-end declaration, instead of a personal or corporation tax return. The key difference between the year-end declaration and a tax return, other than in name, appears to be that HMRC will pre-populate some of the return figures, e.g. bank interest, income from employment.
For the self-employed, it is assumed that HMRC might attempt to pre-populate the year-end declaration with data submitted in the quarterly return figures, however, as currently it the case with VAT, a VAT registered businesses will still need to reconcile their quarterly returns to their yearend accounts and so all must reconcile to the end of year declaration.
Oh – and all taxpayers will need to check that their pre-populated data is correct!
It's time to go digital
So… the upshot of all these changes are that, as a business owner, you are going to have to sooner or later, go digital with your accounts. All the “cloud” package providers will be making sure their software provides HMRC with the information they will need, so you just need to find the one you like and get going!
Given that it is always easiest to start using a package at the start of an accounting year, I would recommend that you give serious consideration to “going digital” from April 2017 so you aren’t trying to cope with new software and a new tax system in April 2018.Digital packages available range from £8 - £30 a month depending on the complexity of your business, so unfortunately there is a cost implication of "going digital", but most businesses find that the benefits and time saved by using the packages greatly outweigh the cost.
For more information on how to choose the right digital accounts package for you contact Rosie Forsyth of Wilkins & Co.