The UK tax system is undergoing a digital revolution, with far-reaching consequences for businesses, landlords and taxpayers.

The government wants it to be fully digital, but not before 2020 at least, with businesses and landlords having to file their accounts online once a quarter. The reforms do not attempt to simplify the tax system; only the way it is administered.

Individual taxpayers with straightforward tax affairs will no longer have to file an annual tax return, but will instead have to confirm their income details in an online Personal Tax Account pre-populated by the tax office from information it has gathered from third parties, such as banks, employers and other government departments.

A summary of the key changes for businesses and landlords can be read below.

 
 
 

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Businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and initially only for VAT purposes. They will need to do so from 2019.

Businesses will not be asked to keep digital records, or send quarterly updates to H M Revenue & Customs (HMRC) for personal tax or corporation tax until at least 2020, though possibly later. Making Tax Digital will be available on a voluntary basis for businesses and landlords with a turnover below the VAT threshold.

We can advise you on the best and most cost-effective way to meet the challenge ahead to make your life easier. For landlords and small businesses we will have a mobile app that enables digital recording and automated population of the quarterly updates.

For VAT registered businesses, our Accounting Solutions package reduces the administrative burden of quarterly reporting.

"The plan to create a fully online tax system is one of the most ambitious and far reaching administrative reforms ever attempted, and has the potential to revolutionise the relationship between businesses, taxpayers and the government".

Making Tax Digital for Business

Not before April 2019 for VAT and not before at least April 2020 for other taxes, businesses and landlords with an annual income above the VAT threshold will be enrolled into keeping digital accounting records using software, apps and spreadsheets, and will have to file quarterly figures with HMRC.

Some taxpayers will be exempt, such as charities, community amateur sports clubs (CASCs); and taxpayers who can’t use digital equipment due to disability, age or remoteness of location.

Free software with limited functionality will be available for taxpayers with straightforward tax affairs, though commercial accounting software with more functionality will be preferable for many. Businesses will also be able to use spreadsheets if they wish, but will have to ensure they meet the necessary requirements.

Eligibility for free software will apply where a business meets all these conditions:

  • they are unincorporated (e.g. a self-employed person or landlord)
  • they have a turnover below the VAT threshold
  • they have no employees
  • they use cash basis accounting

HMRC will not require free software to link or integrate with an agent's product.

Digital timetable

  • April 2019 – Digitisation of VAT
  • Not earlier than April 2020 – Digitisation of personal tax and corporation tax

Digital quarterly reporting

Businesses will send details of their income and expenditure to HMRC once a quarter. New businesses will have to submit their first update within four months of commencement. Businesses eligible for three line accounts will be able to submit a quarterly update with only three lines of data (income, expenses and profit). There will be time after the end of each accounting period to make any adjustments to the updates that have been filed.

Cash basis

HMRC is proposing to allow unincorporated business with up to £150,000 of turnover to use the cash basis for their financial filings. This would allow certain adjustments for debtors, creditors etc. to be ignored.

Companies

Most companies will also have to file quarterly updates to HMRC, though exact details will be published later.

Unincorporated landlords

Unincorporated landlords will be able to use the cash basis, so will only need to declare rental income they have actually received. Conversely, only payments actually made in the tax year would be allowable. Relief for the costs of buying furniture etc. would be give on a replacement basis.

It is not clear, but no turnover limit may be likely for landlords who wish to use cash accounting, as their businesses do not necessarily become more complex as they grow. The cash basis would, as is already the case for individual landlords, operate by reference to the tax year (6 April to 5 April).

Partnerships

A nominated partner in a partnership will file updates on behalf of all partners. These updates would feed directly into each partner’s digital tax account. As a result, each partner will not need software, nor need maintain their own digital records, unless they have other business interests.

It is proposed that limited liability partnerships (LLPs) and mixed partnerships will not be exempt from quarterly reporting, whatever their level of income.

Voluntary tax payments

Businesses will be able to make voluntary payments on a pay-as-you-go basis via their digital accounts. Any voluntary payments made will appear in the digital account of the taxpayer or business as a credit and will be allocated against liabilities as they become due, across their range of taxes. Any unused credits will be carried forward for future use. Taxpayers will be able to choose how and when to pay.

New penalties

A new points-based penalty system will be introduced. A consultation document has been issued that contains a range of options.

 

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