Following the March 2015 budget, the government pledged to make fundamental changes to the way the tax system works – moving to a fully digital tax system for individuals and small businesses by 2020.
The goal of the digital tax system is to create a more effective and efficient system that’s easier to use; allowing HMRC to keep better track of people’s income and reduce administration costs for businesses.
Find out more about the change to a digital tax system, and how it will affect you.
How Will The Digital Tax System Work?
In the digital age, everything happens online, the simplicity and convenience of digital services has made it possible for people to pay their bills, manage their bank and savings accounts, purchase goods and services online – and the HMRC are keen to keep up.
The proposed changes currently only apply to sole traders and partnerships, as well as individual taxpayers. The changes will enable taxpayers to log into an online account on their tablet, smartphone or computer to see their how their tax is calculated by HMRC – in the future, bank accounts will be linked to the tax account to enable tax to be paid via direct debit or installments and businesses will be required to update HMRC quarterly via their online account.
What Are The Potential Benefits and Drawbacks Of Making Tax Digital?
- The simplified system means a reduction in penalisation rates for businesses as they are less likely to make mistakes.
- ‘Real time’ tax information enables taxpayers to keep track of how much tax they will be paying through out the year instead of waiting until the end of the tax year.
- The digital account will allow taxpayers to see a single picture of their liabilities and entitlements in one place.
- Digital tax returns will replace the more confusing offline self-assessment tax return system.
- The move to a digital system will result in administrative job cuts and possible office closures within HMRC.
- The digital system will be very expensive to implement, this could result in delays.
- Not all taxpayers will want to use the internet to manage their taxes – see if you are exempt below.
- Taxpayers will be required to deliver a set of accounts and tax returns on a quarterly basis rather than annually which will mean administrative changes within the business.
Making Tax Digital For Businesses
Some businesses will fall within the requirement to report digitally as early as April 2018 and unlike auto-enrolment, HMRC will start with the smallest non-VAT registered businesses and self-employed businesses. From April 2020, most businesses, self-employed and landlords will update HMRC at least quarterly. The only type of business that will not be required to be digital will be unincorporated businesses with a turnover of less than £10,000.
Whilst business owners may incur an initial extra expenditure for time spent familiarising themselves with the new system, purchasing hardware to access their digital tax account if applicable and possibly expenditure on new software, many will see a saving in on-going administrative costs.
Making Tax Digital For Individuals
Individual taxpayers will be able to interact with the HMRC digitally, at any time; as of April 2016, all individuals and small businesses have access to a digital tax account. In the future, many elements of an individual’s tax returns will be digitally populated from outside information received by HMRC from employers and external organisations such as banks and building societies, rather than information provided by the taxpayer and by 2020, HMRC aims to be interacting digitally with all taxpayers
When Will These Changes Happen?
The process has already begun, as of April 2016, all individuals have access to a personal digital account. With the aim that most businesses, self-employed and landlords will be updating HMRC quarterly for tax obligations through their accounting software by 2020. Some significant future dates set out by the HMRC are:
July – December 2016
- Testing starts for digital reporting of account by small businesses.
- Authorised agents able to manage their clients’ digital tax account.
- Testing starts on using real-time information to show taxpayers how their personal allowances are shared between jobs and pensions.
- Testing starts for digital reporting of income from letting property.
- New online billing system begins, taxpayers able to report additional sources of income through their digital account.
- Tax codes automatically updated to prevent PAYE under or overpayments.
- Interest paid by banks and building societies shown in digital tax accounts.
- Most businesses, self-employed and landlords start updating HMRC quarterly for income tax and NI obligations through their accounting software.
- Taxpayers who report their current child benefit to HMRC no longer required to do so.
- Most businesses, self-employed and landlords to start updating HMRC quarterly for VAT obligations through their accounting software.
- Capital gains tax on the disposal of residential property needs to be paid within 30 days.
- Most businesses, self-employed and landlords to start updating HMRC quarterly for corporation tax obligations through their accounting software
- Full range of HMRC services are available through digital tax accounts.
Digital Tax Penalties
HMRC has proposed to replace the current penalty system and instead opt for a ‘points’ system, similar to driving penalty points. A penalty will be incurred once the points reach a set level (suggested at 4 points). Points would be accrued for late submission and inaccurate information – all points would be cleared 24 months after the last one was added.
Exemptions To Digital Tax
In addition to unincorporated businesses with a turnover of less than £10,000, HMRC has clarified that the “small minority who genuinely cannot use digital tools will not have to do so”, this includes those who cannot for religious reasons, in circumstances where online filing is not practical for reasons of age, disability or remoteness of location or those who do not have access to the internet.
Need a Hand?
The introduction of Digital Tax may make managing tax easier for taxpayers. But the digital system won’t substitute for the invaluable advice accountants like us can offer on financial affairs. For help and advice give us a call on 0117 3790810 and talk to one of our friendly team.
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This post was written by Steph Roffey