The HMRC has launched an initiative, Making Tax Digital, to transform the existing tax system and end the tax return as we know it, by 2020, but the move has produced some confusion between taxpayers. We're here to explain everything you need to know.
Steven McKenzie, Managing Director of Acumen Accountants and Advisors, explains: “The predominant aim of this new initiative is to make tax administration more effective and efficient by introducing a fully digital tax system for the majority of taxpayers, eradicating paper-based tax returns. This includes small businesses in particular, but will also affect self-assessment taxpayers as well. Traders with a total income under £10,000 will however be exempt.
“For many businesses, the stress and paperwork involved in filing an annual tax return is something that can be a little overwhelming. Understandably, when some businesses and individuals heard the rumour that Making Tax Digital would mean quarterly tax submissions, it was not deemed a welcome change. This, however, is not quite correct.
“The new digital accounts will integrate the various information supplied by businesses into a cleaner, simpler system, and instead of submitting one large tax return, taxpayers will instead check accumulating information once a quarter and click submit to send it. This is a much easier system, which will help people keep on top of submissions rather than having one large, arduous task.
“For those who are not able to access digital technologies or are unable to use them, the HMRC is not about to force them. There will be alternatives for those who need them, such as nominating someone else to update information on their behalf or providing information over the telephone instead. Additional assistance will also be provided to businesses that have trouble with digital tools.”
While the HMRC has advised that the modernisation process will reduce administration in the long run, others have felt that this might not be the case and businesses will instead be required to keep extra records. Steven continues:
“No extra records will be required for digitisation since this initiative falls in line with the HMRC’s pledge to reduce business burdens by £400m – so it is something they are really keen on getting right. The process is intended to make things much easier, so any additions to paperwork would be to their detriment.
“Furthermore, anyone who is not already doing so will have access to software and user support. Considering 99% of VAT returns, 98% Corporation Tax and 86% Self-Assessment are already handled online, this is small demographic. Many good accounting firms are already offering software for digital tax reporting, coupled with user training to ensure taxpayers are Making Tax Digital ready.”
Some taxpayers have questioned Making Tax Digital, worrying about increased errors and its affect on compliance, with some suggesting it might slow things down. Steven says:
“The scope for error under a digitised tax system will actually be greatly reduced in comparison to current manual submissions. This is good news for taxpayers, since there should be much fewer receiving a shock tax bill at the end of the year – not something anyone likes!”
Making Tax Digital will start rolling out later this year, with digital tax accounts available online between July and December 2017. Most businesses and self-employed people will then be asked to start updating HMRC quarterly for income tax and national insurance obligations via their accounting software.
By 2019, most taxpayers will start updating their tax obligations online, and by 2020, the full range of HMRC services will be implemented digitally.