The move towards Making Tax Digital has been hailed as ‘the end of the tax return’ and it is intended to streamline the way taxes are reported in the UK, but what will it really mean for your business?
Given that tax returns already need to be completed and filed online, you’d be forgiven for thinking that tax is already digital, but as it stands, apparently, it’s not quite digital enough. Instead of filing digital tax returns at the end of the year, HM Revenue & Customs wants business taxpayers to use ‘functional compatible software’, such as cloud accounting platforms, to report their income and gains in real-time.
For the time being, HMRC has accepted a demand from small businesses that spreadsheets can continue to be used to record tax information, but only if they can be linked digitally to HMRC.
The first phase of the scheme
The first tax to be ‘digitised’ will be VAT, with corporate bodies, sole traders, partnerships, charities, schools and public bodies that meet the VAT threshold of £85,000 all required to submit their VAT returns digitally by April 2019. There will be no financial penalties during the first 12 months of the new reporting requirements to give businesses some time to adapt to the new way of doing things.
Currently, businesses are only required to keep a record of their total sales for their VAT return. Under the new system, that will change. Businesses will be required to keep a digital record of all their sales broken down by the VAT liability they attract (zero-rated, standard-rated etc.). They will also have to break down the purchases they make by VAT and retain information about the adjustments made for reverse charges on imported services, car leasing and business entertainment.
The potential implications for businesses:
- Initial costs. If you do not currently use cloud accounting software in your business then the requirement to use ‘functional compatible software’ could bring an additional cost. However, HMRC suggests that businesses will save on the costs of compliance from 2021, so the hope is that any additional expense now will be recuperated in time.
- An increased reliance on accountants. There are some concerns that the requirement to share your information with HMRC on a continuous basis might mean businesses need more assistance from their accountants, which will increase their costs.
- More efficient businesses. The good news is that not all the implications of the new tax system will be negative. Rather than relying on paper ledgers and clumsy spreadsheets, the use of cloud accounting software will allow businesses to identify and rectify mistakes immediately and potentially avoid financial penalties from HMRC. When it comes to claiming expenses, rather than digging through a box of receipts at the end of the year, expenses can be recorded as and when they’re incurred.
The opinions expressed by third parties are their own and not necessarily shared by St. James’s Place Wealth Management. This article originally appeared on the KPMG Small Business Accounting website.