In a bid to simplify tax reporting, Her Majesty’s Revenue & Customs (HMRC) is moving away from only filing taxes annually. Instead, businesses will submit tax information – such as revenue and expenses – every three months under the new Digital Tax initiative.
For this reason, businesses will be issued with a digital tax account. Some of your business information will flow automatically into your digital account, including banking data and information from other government departments which makes things simpler. However, you’ll be required to check this data every three months, and provide any additional information that HMRC requires. Businesses who submit quarterly VAT reports will already be familiar with this way of working.
When will HMRC make tax digital for businesses?
Making tax digital will be introduced in stages. The timeline isn’t finalised yet, but some types of businesses may need to transition as early as 2018. Others could have until 2020.
THE GOOD NEWS
One of the main advantages of making tax digital for businesses is that it will lessen the chaos surrounding annual tax returns. Here’s a brief summary of making tax digital benefits:
You’ll submit tax data every three months, which means you can forget about cramming twelve months of work at the end of your financial year.
Far less paperwork
Computer software will make an automatic record of money coming into and going out of your business. You (or your tax advisor) will just check the data and update it to HMRC each quarter.
Because tax will be calculated quarterly, there’s far less chance of a big bill building up. You’ll find out what your tax liability is every few months so nothing gets out of hand.
More chances of lowering your bill through tax planning
Businesses that keep regular tabs on the tax they owe can make strategic decisions to lower their bill. You might make more retirement contributions or reinvest in the business, for example.
How come I don’t have to do paperwork?
Electronic data about your business will go directly to HMRC from banks, building societies, and other government departments. You won’t need to manually process this information for them. That’s perhaps the biggest benefit of making tax digital for businesses. If you set up a smart tax and accounting system, you’ll have far less work to do.
THE BAD NEWS
There’s not much wrong with gaining greater visibility of your tax situation. For some businesses, however, there will be changes to manage. Here’s a summary of the issues you may have with the switch to Digital Tax:
More reporting deadlines
A single annual filing will be supplemented by four quarterly reports. These won’t be nearly as intensive, however, because there won’t be 12 months of transactions to process. And because much of the data-entry will be automated, there should be less effort involved.
Compulsory use of technology
By bringing in Digital Tax for businesses, the HMRC requires you (or your tax advisor) to submit returns online, through either an HMRC app or online accounting software.
Loss of privacy
Some of your electronic transactions will be visible to HMRC. But you’ll be able to review the data and fix mistakes before it’s submitted and by updating your accounts more often, you’ll be able to react faster to opportunities and threats in the business.
Contact us today for an initial free consultation.