Going digital: how HMRC’s new initiative will help small businesses concentrate on business, not tax
23 January 2018
Millions of businesses are already harnessing the opportunities of the digital age through marketing, selling, invoicing and banking online – and reporting information to the taxman is the next step in the online business revolution.
At the moment, many businesses, self-employed people and landlords are still keeping their records on paper. Some simply file all of their receipts and invoices throughout the year then try and make sense of them many months later when they come to do their tax return.
This can cause a fair amount of stress, as the focus shifts from running the business to trying to get their tax right. Indeed, there is an overall loss of more than £8billion a year in tax resulting from avoidable errors, much of which comes from small businesses. This not only costs the public purse, it also costs the businesses themselves, who are faced with uncertainty and worry when HMRC is forced to intervene.
This is why the government is investing £1.3million over five years to create a more modern and efficient tax system. Making Tax Digital (MTD) is fundamental to achieving that.
We want businesses to be able to get things right with the minimum of effort. MTD will give greater certainty regarding the tax they’re paying by simplifying and integrating it into the daily running of the business. The dread of the annual tax return will be a thing of the past for millions.
Under the changes, most businesses, self-employed people and landlords will need to keep their business records digitally and update HMRC quarterly using software or an app. This will be a light-touch process, allowing them to stay up-to-date with their tax affairs throughout the year and providing a more accurate picture of what they’ll need to pay at the end of the financial year.
From the conversations we’ve had with small businesses, we know that many of them have already made the switch to digital record keeping. Approximately two million small businesses already keep their accounts using software, and 30,000 businesses are using apps to regularly record their income and expenses.
Last year we consulted on the proposals for MTD and received around 3,000 responses from people to help shape the way we implement the new system. There was a clear consensus that digitising the tax system was the right way to go, although many expressed concern over their capacity to make those changes within the proposed timeframe.
This is why the chancellor announced in his Spring Budget in March that we would be giving the vast majority of businesses and agents more time to prepare for MTD. Small businesses and landlords with annual turnover below the VAT threshold will now have until April 2019 to start keeping digital records. This change will benefit 3.1 million businesses and landlords.
“We want businesses to be able to get things right with the minimum of effort. MTD will give greater certainty regarding the tax they’re paying by simplifying and integrating it into the daily running of the business. The dread of the annual tax return will be a thing of the past for millions.”
We are introducing MTD gradually, starting in 2018 with income tax for businesses, self-employed people and landlords with annual turnover above the VAT threshold. In 2019-20 we will bring in those with annual turnover above £10,000, and we will extend MTD to VAT as well as income tax. Then from 2020 we will extend MTD to corporation tax.
While the change won’t be mandatory for most until 2019, any businesses or landlords who want to go digital before that date can do so. In April, HMRC began to pilot these changes. This started with a small number of businesses but will build up to hundreds of thousands so we can thoroughly test the changes before they are fully rolled out. This will ensure the software is user-friendly and give individuals and businesses time to prepare and adapt.
We recognise that there will be transitional costs, especially for those businesses who are currently keeping records on paper. Free MTD software will be available to businesses with straightforward tax affairs and we will use the pilot to ensure we have the right help in place to support businesses and their agents through the change. Once businesses have gone digital they will find there is a small ongoing saving and that getting their tax right is now much simpler.
If the pilot is something you or your business is interested in getting involved you can find more information on the GOV.UK website by searching for Making Tax Digital.
At the heart of MTD is a desire to simplify the tax system so that business people can focus on what really matters to them – running their business. We will continue to work with businesses, representative bodies, tax agents and the software industry to ensure we deliver a digital tax system that works for everyone.
Jim Harra is Director General, Customer Strategy and Tax Design, HMRC