Digitisation of Tax ‘Harder on Small Businesses’
In preparation for its ‘Making Tax Digital’ project, HMRC is reviewing the results of its official consultation period with the business community. The UK200Group, the UK’s leading membership association of quality-assured chartered accountancy and law firms, has been an active part of the consultation process and has in turn asked its members for their views and the views of their SME clients.
The UK200Group represents the interests of 150,000 SMEs through its members and it is taking a lead on tax digitisation to guide business owners through the process. So what exactly does HMRC mean by ‘making tax digital’?
By 2020, businesses, self-employed people and landlords earning over £10,000 per annum will manage their tax affairs through a digital, online account, and will be required to update HMRC at least quarterly.
These digital tax accounts will be a more sophisticated version of the personal tax accounts which are already in use for individuals, and allow taxpayers to see their Pay As You Earn position, tax credits and National Insurance Contributions, plus an estimate of state pension on retirement. However, by 2018, banks and building societies will be required to report interest payments to HMRC to be included in digital tax accounts, and individuals will be able to report additional sources of income digitally.
Digital tax accounts for businesses will show an overview of income tax or corporation tax, VAT and National Insurance Contributions, plus income and expenses on a quarterly basis.
Taxpayers will be expected to use software accounting systems to record day-to-day transactions, categorise them into different types of income and feed back to HMRC.
Andrew Jackson is Head of Tax at UK200Group member Fiander Tovell and Chair of the UK200Group Tax Panel, and is also on the consultative committee of the Office for Tax Simplification.
He said, “The digitisation of tax is going to have a very different effect on small companies compared to larger ones. For larger companies with financial controllers, accounts teams and reasonably sophisticated software accounting systems in place, the switch will be much easier than for smaller businesses without a dedicated accountant or bookkeeper. There is already internal reporting going on in a large business so it is not so difficult to start diverting that reporting to HMRC.
“Making tax digital will force all businesses and self-employed workers to start using accounting systems, and that implies having someone to deal with accounts – even if they’re not a chartered accountant.
“If they don’t have someone to input the data, keep the system up-to-date – who is aware of how things need to be done – they will have to get to a place where they have one. And often, that will be a bookkeeper who has never had to deal with taxation before.
“HMRC officials think that getting small business to use accounting systems will reduce errors, and if people are making fewer errors they should have a more accurate idea of how their businesses are performing. That’s got to be a good thing.
“However, they don’t seem to appreciate why people aren’t using accounting systems at the moment. I think what they’ve failed to identify is that businesspeople aren’t doing it now because of the cost of implementing an accounting system - this isn’t just financial, but includes the time and effort spent learning how to use it and keeping it up to date. It’s not just a case of putting a few numbers in various boxes – it takes a whole new set of skills to use these programs properly.
“This, again, is going to affect small businesses more than it affects larger ones because the overheads for setting up accountancy systems are going to remain broadly the same, regardless of turnover.
“A complex accounting system, for example, is also massively over-engineered for a lot of the UK’s businesses, which might only have half a dozen clients or customers.
“HMRC seem to acknowledge this, and are also proposing that businesses be allowed to use simplified methods for doing their accounts. Unfortunately, what this would do is destroy a lot of the useful information that is the whole the point of preparing accounts in the first place.
There are also technical issues that Andrew sees as potential problems for his clients, such as whether he’s going to be able to access their digital tax accounts easily and effectively.
“HMRC officials are happy to make the information in the digital tax account available to agents. Agents will be able to dial into HMRC’s systems, download the information they need and pull it into the tax return or the accounts that they’re preparing, or use various interfaces to see the information in the way that they want to.
“They’ll not be restricted to seeing the information in the way that the client does, and the format will be more flexible and more useable. I like that.
“However, what HMRC officials have said is that the agent will not be able to see the digital tax account itself. What they’ll have to do is reconstruct the account from the data they have available. Now that is very dangerous because it means that the taxpayer and the agent are potentially seeing different things. I think it’s crucial that we can see on our screens what the client can see on theirs. If we can’t see your tax affairs, how are we supposed to help you handle them?”
The subject of tax digitisation will be covered in more detail at the UK200Group Annual Conference, held at the Ageas Bowl, Southampton, S030 3XH from 16 to 18 November 2016.