How digital tax collection could affect businesses

Digital tax collection

It sounds like a bold idea — requiring millions of small firms to keep electronic accounting records and submit digital tax returns — but experts believe the Making Tax Digital (MTD) policy proposed by the UK government will give British firms a clearer view of their tax calculations and could revolutionise tax collection around the globe.

Legislation to make businesses, including self-employed traders and landlords, manage their tax affairs digitally — helping to avoid underpayment and overpayment and phasing out the need for annual tax returns for millions of people — was sacrificed to rush through tax legislation ahead of the UK’s June general election. Now the idea of digital tax accounts is firmly on the agenda and has been included in the UK government’s latest finance bill. The Treasury and HM Revenue and Customs released this timetable:

  • Only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records, and only for VAT purposes. 
  • They will need to do so only from 2019. 
  • Businesses will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020.

Businesses and landlords with turnover below the VAT threshold can decide when to move to the digital system.

The UK is not alone. Costa Rica, Indonesia, Malaysia, Peru, Vietnam, and Zambia have introduced similar schemes in the last 12 months, while Austria, France, Lithuania, Luxembourg, Poland, and Portugal have adopted the EU’s digital tax policy; and a number are watching the UK intently to see whether they should follow suit.

But is Britain’s small business community ready to make such a big change? The UK200Group, an association of independent accountants and lawyers, estimates that 65% of small firms still don’t use accounting software. The Federation of Small Businesses, which sees small firms at first hand, puts the typical conversion cost at more than £2,000.

For many small firms, MTD would be a big change. The key, argues Jonathan Riley, head of tax at Grant Thornton UK, is to prepare early. Small firms should look at what they currently do on paper and then how they can use technology to automate their existing processes or make them more efficient.

“As with any change it is better to get started sooner rather than later in order to become familiar with working digitally,” added Riley.

It is especially important to keep any changes simple because MTD will increase admin for most small firms. “A large number of small business owners already face significant time pressures. Therefore, updating their records quarterly and making a minimum of four reports a year to HMRC is unlikely to receive a warm response,” said Craig Harman, a tax specialist at accountancy firm Perrys.

Some firms may want to make all the changes themselves while others may hand the task to their accountant. Some accountants believe that MTD will increase their workload, while others think that, in the longer term, they may have less work as smaller firms learn how to exploit the claimed benefits of MTD to manage their own tax affairs.

A couple of issues firms should consider are VAT filing dates and year ends. “Those businesses with a VAT year that is not coterminous with their accounts year may wish to consider aligning those,” said Tina Riches, national tax partner at Smith & Williamson.

But whatever HMRC decrees, small firms need to set deadlines, said Paul McCooey, from East Midlands accountancy firm Duncan & Toplis. “Similar to the process regarding auto-enrolment [for pensions], they need to have a clear schedule of critical dates and targets to meet along the way to ensure readiness.”

That may mean recruiting needed skills, although most small firms will balk at the idea of taking on additional staff to handle MTD. So in general they should consider tapping into the skills and special knowledge provided by their accountancy advisers.

Harman reckons that businesses that already use accounting software will generally feel comfortable about making the quarterly submissions to HMRC. But there is also a full year-end submission, which may incorporate revisions and other allowances. The work on this should be broadly similar to current year-end accounts, argues Harman, and may require some specialist advice and assistance.

Focusing on the necessary software will be vital for all firms involved. Even those currently using accounting software will need to ensure it can handle the new functions imposed by MTD. But firms that keep manual accounts must decide whether to install accounting software or use some kind of third-party service, perhaps through their accountants.

Laura Clarkson, a partner at accountancy firm Mazars, believes there are some important questions to ask before a firm chooses its software. “For example, does the software have a bank feed, a facility to scan invoices, and an integrated payroll application?” she said.

Managing the culture shift resulting from the move from paper to digital records will also be pertinent. “Having champions who are passionate about modernisation should make the transition smoother,” argued Clarkson. “If it all seems too much, outsource some of the functions initially, then gradually bring them back in-house when you are confident you can deal with them.”

Accountants should help their clients manage the culture shift, said Hazel Gough, associate partner at accountancy practice Chiene & Tait. “MTD requires a major behavioural change for businesses,” she said. “It is not just about using digital records. The records need to link to HMRC’s systems.”

For many small firms, the move to MTD will seem like another burden to bear. It will certainly create more work, but the move can also be used to make changes that deliver real benefits in the longer term.

“MTD is a great opportunity for business owners to have proper clarity over their business finances and be better equipped to pay their tax bills,” said Ed Molyneux, chief executive of FreeAgent, which provides cloud accounting software.

And Nick Williams, from accounting software supplier Intuit QuickBooks, said that small firms using MTD will have a clearer view of their tax calculations and due dates through their digital accounts. “This will eventually result in better decision-making as clients will have better insights into their financial position throughout the year.”

For updates on making tax digital, visit gov.uk.