The world is going digital, and tax is going with it. McPhersons Chartered Accountants explain more about digital tax and the impact that this could have on you and your business
What is ‘Making Tax Digital’?
In 2015, HMRC issued a paper, ‘Making Tax Digital’, which proposes that by 2020 they will have moved to a fully digital tax system. This is not just about software, it signals the end of the traditional tax return. By 2018 businesses, the self-employed and landlords will need to use software or apps to keep business records and to provide financial information to HMRC on a quarterly basis.
Digital accounts will give small businesses greater certainty and control over their tax position. Those who pay more than one type of tax (corporation tax, VAT, PAYE) will be able to take a single view of their total liabilities across all taxes. There will also be the option to pay tax as you go to help manage your cashflow.
Will it apply to everyone?
- The gross turnover or property income threshold of £10,000 is currently being discussed and it is likely that only the smallest unincorporated businesses may be exempt. It will not apply to employees or pensioners unless they have additional income of £10,000 through property or through self-employment
- Deferring may be possible by one year for gross turnover or income of over £10,000 but below a threshold to be determined.
- A very small minority who genuinely cannot use digital tools will not have to comply. More details on this are promised.
How do I convert my business to digital?
Digital record keeping will normally mean using a ‘cloud’ or an online accounting package which records income and expenditure as near to real time as possible. McPhersons will be supporting their clients with this transition with software such as Quickbooks Online, live bank feeds and apps such as Receipt Bank as well as assisting with the transition to cloud accounting.
For some clients this will be a huge change. There will be no more handing over a bag of receipts at the end of the year! Even the use of spreadsheets to record transactions will be superseded by cloud accounting. For those who do their own accounts and tax returns, the more involved system could result in them paying more tax than they need to.
What third party information will be included in my digital tax account?
HMRC already has access to third party information and this will be used more effectively and in real time – i.e. not just looking back historically but looking at live data. For example, collating information from employers, pension providers, banks and building societies. Going forward it may also include income from dividends, peer to peer lending and property and savings income.
How will making tax digital work?
HMRC is currently building its own system alongside software providers like Quickbooks, Xero and Sage. Businesses will need to ensure the software they choose is compatible with HMRC.
McPhersons already offer their clients access to licensed software with all these packages with Quickbooks being the preferred choice for many of their clients. Accountants are going to have a key role in helping their clients make the transition and McPhersons have already gone through the move from desktop to cloud with many of their clients.
How can McPhersons help me convert from desktop to the cloud?
McPhersons are cloud accounting specialists and are trained in a variety of cloud accounting software. If you are not yet on the cloud, they will advise the best solution for your business.
What are the benefits of digital accounting?
There are ways to get the most out of on-line/digital accounting and these include:
- Utilising ‘bank feeds’ which can automate much of the bookkeeping work – automatically posting entries to avoid you keying them in.
- Expense tracking – taking photos of your expenses and sending these direct to your accounts software which then posts it.
- Automated invoicing.
- Digital payslips for payroll.
- Always having up to date information to enable business and tax planning.
What will it cost my business to convert?
Free software has been promised by HMRC but seems yet to materialise. However, McPhersons can offer a fixed fee and an affordable monthly payment solution that fits your business model whether you are a sole trader, partnership or limited company. This would cover all the work that is required. There is a view that reporting online could lead to mistakes and fines.
HMRC is attempting to reassure people that they can report online with confidence and are also being more lenient when mistakes are made. The consultation proposes a graduated model with each non-deliberate failure to submit information on time attracting penalty points. Only once the points reach a set level would a penalty be charged.
They are also willing to share more information with software developers about the triggers of tax investigations. Developers can then adapt their software to warn taxpayers to make amendments before final submission of information.
Tax is a complex issue and most businesses will retain their accountant to ensure they are not paying more tax than they have to.
How will I pay my tax going forward?
You will be able to view your current tax position at any time and can choose whether to pay in a single payment or pay as you go. Voluntary Pay As You Go will apply to those unincorporated businesses, sole traders and landlords, in respect of their Income Tax/National Insurance Contributions/Capital Gain Tax, from 1 April 2018, to VAT from April 2019 and to incorporated businesses, in respect of their corporation tax affairs, from 2020.
Contact us on 01424 730000 or firstname.lastname@example.org and we will get you fully prepared for the important changes ahead.