New proposals for a digital tax system could end up hitting small business
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Earlier this month, the consultation on the government’s plan to have a digital tax system by 2020 came to an end. The plans have been welcomed by many but some experts have warned that these changes could be challenging for a significant amount of small businesses.

How much will the digital tax system affect small businesses?

These changes were first proposed in the budget of March 2015 when the government announced its new vision for a transformed digital tax system. This vision was later accompanied by the publication of ‘Making Tax Digital’ a series of proposals complete with a view for how the digital tax system could look.

The proposals for the tax system focus on a few main areas that should make the tax system more user friendly and fully digital.

Areas covered by digital tax proposal

  • Eradicating bureaucratic form filling
  • Eliminating unnecessary time delays
  • Abolishing the annual tax return
  • Creating digital accounts for taxpayers
  • The ability to upload information automatically

As a result of this, any small business or self-employed person earning more than £10,000 a year will need to manage their own tax affairs via an online account. Each quarter, business and personal income, along with expenses will need adding by the taxpayer to their account. Online there will also be an overview of the different kind of taxes appropriate to that particular taxpayer displayed.

Having the tax system fully digitalised should reduce errors, allow any errors to be fixed quickly, improve and speed up the flow of information and reduce admin for taxpayers, businesses and accountants as well as HMRC. It sounds like a good update to a system which is becoming outdated and for quite a few taxpayers stressful, however, many small businesses are worried about whether they will be able to cope with this.

Making tax digital means that accounting software will have to be readily available for businesses in order to manage their taxes to send to HMRC. However, many small businesses do not have the required software and will not only have to purchase it but they will need to train up a member of staff to be able to use it.

This will increase the amount of administration in the company taking up valuable time and money to train staff and purchase software. Larger companies are typically at an advantage regarding these changes as they are more likely to have good accounting software and a dedicated accounts person or department.

The government tried to reassure businesses by saying that HMRC will ensure that there are free apps and software for businesses to use. They also stated that there will be time to adapt to the changes which will come into effect in April 2018 for some and will then be rolled out slowly after this date.

digital tax system small business content

The changes came in response to businesses wanting to know how much tax they owed throughout the year instead of having to wait until the year end for its tax bill. Elaine Clark, founder and managing director of spoke to the Guardian regarding the proposals; “I’d expect accounts and bookkeeping to move up the priority list for many small businesses come 2020. Some owners will need to change their approach to managing their financial records… The old approach of popping along to your accountant with a carrier bag full of invoices, receipts and bank statements once a year will be gone forever.”

Keeping on top of the books as a result of these changes will be one positive to take from these changes for small businesses. They will be able to see any issues much closer to when they occur and deal with them much more quickly and efficiently. Any business decisions can be made based on up to date financial information which can lower the risk for any new investment ventures.

For small businesses, with only one or a few employees, it may be difficult to find the time to manage the accounts around their current workload. Many small businesses will find it difficult to employ someone specifically to look after their finances, so it will most definitely shine a spotlight on bookkeeping and the new found importance of it within many businesses over the coming years.

National chairman of the Federation of Small Businesses (FSB), Mike Cherry, spoke out to highlight the difficulties many in the business community may already be facing currently with the increase in the national living wage and pensions auto-enrolment. “the business community still has fundamental concerns around the proposals, including on mandatory quarterly tax reporting… We estimate that the average small business could face costs of £2,770 from this reform.”

These changes to the tax system are scheduled to come into effect soon but there is still plenty of doubt and worry surrounding the proposals. For many individuals and businesses, the changes should make one of the most time consuming parts of business easier; however for others, it could make filing their tax returns a lot more difficult than it currently is.

If you are concerned about these changes or you are confused about the way taxes for businesses work, get in touch with a tax specialist as soon as possible.