The move is the first phase of the government’s Making Tax Digitalagenda, which it intends to eventually roll out to the administration of all tax, corporate and personal. The aim is to do away with tax returns and replace them with a more streamlined, swifter system in which tax data must be shared with HMRC a minimum of four times a year.
It is hoped that the move will save the government billions of pounds in lost revenue from clerical errors and allow tax payers to ‘pay as they go’, rather than facing large lump sums months in arrears.
The majority of VAT-registered UK businesses already use some kind of accounting software for their bookkeeping. However, it is believed that as few as one in 10 platforms used are compatible with the Making Tax Digital system. That means there is now a rush to get compliant options up and running ready for next tax year.
Under the new regime, every business will have its own digital tax account with HMRC. In theory, it won’t matter how businesses choose to create and keep tax records, as long as it is done digitally – spreadsheets are still fine. But the important thing is that these records must be linked to your digital tax account. That is where the need for compatible software comes in.
The new software platforms will act as a gateway to the digital tax system, processing financial records and extracting the relevant data to send to HMRC on a quarterly basis (as a minimum). It is anticipated that many of the new platforms will be cloud-based, meaning they will be accessible on multiple devices, including via smartphone apps. Some may also include useful features such as invoice scanning, allowing business owners to quickly upload transaction data simply by taking a photo.
If you hire an accountant to handle your bookkeeping, you probably won’t need to do anything ahead of the Making Tax Digital launch. As your bookkeeper probably already uses some kind of accounting software, it will be up to them to transition over to a compatible product.
If you do your bookkeeping yourself, you should contact your accounting software supplier and ask if the product you use will be compatible with Making tax Digital by April 2019. If you don’t use any form of accounting software, now is the time to start. HMRC has announced that it is working with 150 software firmsto get compliant platforms on the market by 2019, and 40 have already taken part in the live pilot which launched in April this year.