For millions of UK small businesses, ‘tax season’ represents a costly, time-consuming inconvenience. But Britain’s tax landscape is transforming: in March 2015, HMRC announced its plan to update the self assessment tax payment process – moving away from annual paper returns, and towards a digitized, online system.
The government’s new digital tax accounts system introduces a fundamental shift in the way small business owners – both those working as self employed and those operating as limited companies – report and pay their tax liabilities.
The introduction of digital tax accounts will, within a few years, make the annual self assessment tax return obsolete – so how exactly will the changes affect Britain’s small businesses?
Rolled out over 2016, the new system is now available for small businesses. Essentially, it introduces digital tax accounts: online portals collecting users’ tax details into one place and – in theory – streamlining the payment process. It’s worth having a look at this HMRC video which gives an example of how digital tax accounts will work for a small business.
The significance of the transition is being compared to the internet banking revolution – HMRC aims to have all taxpayers, from landlords and the self-employed to SMEs and enterprise, using digital tax accounts by 2020.
What is a Digital Tax Account?
Digital tax accounts collect and consolidate all relevant taxpayer information and introduce the ability to manage and pay tax online. As a small business owner, you will be able to register your organisation’s account with HMRC, calculate, and update your tax information in real time, from your laptop, tablet or mobile phone.
Since digital accounts store data online, HMRC is saying there will be no need to re-input personal information – eliminating much of the administrative effort involved in annual returns.
Over 2 million small businesses are now using digital accounts – 5 million are expected by the end of 2016.
Beyond paying tax online, the jump to digital will integrate numerous tools into the filing process, allowing users to:
- Link to bank or building society accounts to streamline payment
- Integrate PAYE information with company payroll submissions
- Claim entitlements such as tax credits, childcare allowances or retirement benefits
- Access personalized support – including businesses-specific info on subjects like payroll and VAT
Quarterly tax updates
One of the most significant aspects of the new system is the introduction of a quarterly – rather than annual – tax payment process.
By April 2018, all businesses using digital accounts will have to adopt what HMRC is calling a quarterly tax ‘update’ schedule. HMRC is keen to point out this does not mean four tax returns per year – but rather that quarterly ‘updates’ will improve tax collection accuracy and reduce the incidence of over and underpayment.
Small business concerns with digital tax accounts
Despite HMRC’s assurances, many small businesses have criticized the new system – in particular the quarterly schedule – arguing that it could add needless red tape and extra administrative cost to the taxation process.
Furthermore, many UK small businesses do not maintain an extensive online presence: asking them to migrate to the digital tax accounts system, under the timetable HMRC has set out, may be unrealistic.
To meet the concerns raised by small businesses, in August the government announced an initial period of exemptions from the digital system for both the self-employed and small businesses with turnovers of less than £10,000. The exemption criteria includes sole-traders, partnerships, associations and landlords, and removes both the obligation to keep digital tax records and make quarterly ‘returns’.
The government is also offering a one year deferral period for certain businesses earning above the £10,000 threshold – the specific qualification criteria for deferral are yet to be released.
Importantly, both the exemption and deferral periods for digital tax accounts are finite. By 2020, most small businesses and self-employed taxpayers will have to file tax under the digital system – effectively ending the era of the annual ‘paper’ self assessment tax return.
What happens next?
HMRC has released a timetable for the roll-out of the digital tax accounts system – outlining its aim that ‘most’ businesses register accounts and begin quarterly income tax updates by the end of 2018, begin quarterly VAT updates in 2019, and Corporation Tax updates in 2020. The timetable includes additional features yet to be rolled-out, such as:
- An online billing system
- Digital reporting of additional income
- Automated tax code adjustments
- An overview of tax liabilities
- In-account displays of bank and building society interest
The Government’s plans for Making Tax Digital were due to be included in the Finance Bill 2017. However, the decision to call a snap General Election has meant that large parts of the planned Finance Bill 2017 have been dropped in order for the bill to be enacted before Parliament is dissolved.
Making Tax Digital is one of the parts of the Bill that have been removed, and so these plans will now be debated after the General Election.
With the timetable for the switch to Digital Tax now up in the air, it’s worth researching the ways in which your business will be affected by the digital transition – to avoid disruptions or unwelcome surprises down the line.
To register your business for a digital tax account, you will need to create a Gateway Account with HMRC. The process involves identity verification and it is worth keeping a note of your login details for future reference.
About the author
This guide has been written exclusively for ByteStart by Simon Wright, Audit & Compliance manager at activpayroll. He is responsible for providing employment tax and National Insurance compliance advice to his colleagues and to external clients. This advice can be on any issue around UK payroll compliance, expenses and benefits, statutory payments etc.
More help on tax and money matters
For more information and guidance to help you deal with the thorny subjects of tax, accounting and finance try some of our popular guides;
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- Corporation Tax – How to reduce your bill
- Capital Allowances – A review of the various schemes available for businesses to cut their tax bill
- Using Research & Development tax relief to reduce your corporation tax bill, or claim a tax refund from HMRC.
- ByteStart’s Guide to the main business taxes
- Dividend tax changes from April 2016 – A summary of the financial effects for small business owners
- How are limited company dividends taxed?
- 10 common Self-Assessment Tax Return mistakes and how to avoid them