Making tax digital – are you prepared to switch?

HMRC has announced that digital tax reporting will be introduced for income tax in 2018 and other taxes by 2020.

All individuals will have a Personal Tax Account summarising their tax information online. Where information is provided by third parties (banks, etc) then this will be included automatically so does not need to be declared on a tax return. The system will be developed so that changes in circumstances are submitted online thereby avoiding the need to submit annual tax returns.

Businesses will be expected to use digital record keeping for VAT from 2019 and for corporation tax from 2020. Quarterly updates will have to submitted to HMRC using chosen software. HMRC argues this gives taxpayers a clearer view of their tax position during the tax year.

The biggest change will be felt by small business who currently only prepare accounts and tax returns once a year. HMRC has promised they will provide an alternative to digital reporting but it is to be expected that they will still have to report quarterly.

HMRC believes that by making taxpayers report quarterly online they can clamp down on tax avoidance and reduce the tax gap as well as the difference between the tax HMRC estimates should be paid and what is actually collected. It is advisable to anticipate that once they have this information, there will be an expectation for the tax to be paid quarterly as well.

Whilst these changes are still some way off, HMRC’s intentions are clear and all taxpayers need to be aware of the administrative and cash-flow implications.