The digital revolution is not just something that’s just affected our personal lives – it’s also had a profound effect on the business world, with more and more businesses being run ‘virtually’ in the cloud and basing their financial systems around an online approach to doing business.
And this move to digital finance is something that’s about to have a profound impact on how you record, file and pay your tax.
HM Revenue & Customs (HMRC) is not an institution known for its cutting-edge use of technology, but even the folks at the revenue are now moving the collection of tax online – meaning there’s a highly pressing need for you to move your bookkeeping and accounts to a digital format that can submit online tax returns.
HMRC’s move to digital
Back in the 2015 Budget, George Osborne (then the Chancellor) announced the Government’s plans for ‘Making tax digital’ – an incentive with the aim of having all UK businesses submitting their tax returns digitally by 2020.
In a world where online business solutions and cloud accounting software proliferate, HMRC saw an opportunity to streamline the paper-heavy, time-intensive tax return system and to bring it kicking and screaming into the 21st century.
Making tax digital is based on four key pillars that provide the impetus for this digitisation of the tax system:
- Tax simplified– the idea here is that you, the taxpayer, shouldn’t need to send HMRC financial information more than once, or that it could source through other means. By going digital, HMRC has access to data from your bank, your business loan provider or other government departments, streamlining the whole process of collecting the information needed to work out the tax you owe.
- Making tax digital for business – rather than submitting returns quarterly or annually for your various business taxes, the aim is for there to be an ongoing communication of financial data to HMRC. By making the process as close to real time as possible, the ‘end-of-year tax return’ can be eliminated and your business will always know the exact amount of tax it owes, at any given point in the year.
- Tax in one place – by the 2020 cut-off date, every business will have it’s own ‘digital tax account’ where you can see all your financial information and tax liabilities in the one place. It simplifies the tax system, gives you a better overview of your business tax and makes it easier to administer the payment and collection of the tax for HMRC.
- Making tax digital for individual tax payers – digital accounts won’t just be for big businesses: every individual taxpayer, micro business or sole trader will also have their own account. In the same way, you’ll have all your financial and tax information in one central, online place – making it easier to manage your tax.
What does this mean for my tax?
So, how does the transition across from paper tax returns to online, digital filing affect you and your business?
Over the next two or three years, you’re going to have to make sure your financial systems are capable of supplying the digital data and financial information that’s needed in order to operate your digital tax account.
The level of upheaval this causes will be dependent on how you currently run your books and complete your accounts.
- Paper-based accounts – if you’re running a purely paper-based accounting system, you’re going to need to replace this wholesale with an online accounting system – a move which could have a steep learning curve if you’re not terribly conversant with technology.
- Excel-based accounts – if your bookkeeping is recorded in an Excel spreadsheet at present, you’re also going to need to upgrade to more flexible online accounting package – a system that has the integration and functionality to submit your financial information to HMRC.
- Desktop accounting software – if you use a desktop accounting package, you may still require an upgrade to allow you to submit your accounts in real-time to HMRC. Switching to a cloud accounting package will bring considerable benefits and will make the whole tax process far simpler.
- Cloud accounting software – the vast majority of online accounting packages will be set up to record and submit your financial information in the right format for HMRC’s digital accounts. It’s the best option and the one that future-proofs your business for many years to come.
The need for real-time numbers
It’s going to be imperative that your bookkeeping is up to date and accurate. With the real-time submission of your business’s financial data, it’s vital that this data is correct and giving a true representation of your financial transactions.
Of course, your helpful, hard-working accountant (that’s us) can still make year-end adjustments for accruals, prepayments, and other corrections. But your day-to-day transactions must be a true reflection of your finances.
HMRC will now have a ‘window’ into your affairs like never before. With all your financial information contained in your digital account – and smart software to sniff out any errors or mispayments – there will be complete transparency around the money you and your business are earning: and by dint of this, the tax you should be paying.
Move your bookkeeping to the cloud
What can you do to make your business as ‘digital friendly’ as possible in the run-up to 2020?
Now’s the time to get a proper cloud-based bookkeeping system in place, or to make sure that your existing software is working effectively and has the functionality needed to submit digital returns to HMRC.
At Caplan, we’re conversant with a variety of different accounting packages – including Xero, QuickBooks, KashFlow and Sage – so we can help you source the most suitable bookkeeping solution for your particular business.
Why not speak to us to see how we can help! This is a real opportunity to get your system running properly and get yourself ready for the digital future of tax.
Get in touch to have a chat about updating your bookkeeping systems and see the difference that a digital approach to tax can have for your business.