Preparing for digital tax

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If you’re an accountant or a small business owner then you should be aware of the impending shift to digital tax. The monumental change which will see the HMRC completely transition to digital tax by 2020, is actually long overdue and will make it easier and quicker to manage taxes without having to fill in so many forms.

We can all look forward to a tax system which is frequently updated over the course of the year, and allows you to keep tabs on things so you know how much you have to pay in advance. Sounds good, right? But are you ready for the change?

What You Need to Do for Digital Tax

From April 2018, many businesses and self-employed individuals will need to update HMRC quarterly using the new digital system. While this means you no longer have to wait until the end of the tax year to find out how much you owe, it also entails new responsibilities. You will have access to a personal online account which you are required to update; it will prompt you when action needs to be taken and includes support via webchat and messaging.

If your business does not already make use of an online accounting solution like QuickBooks, then you should start using one as soon as possible. Accountants need to advise their clients on this now, so that their data can be collected and submitted to HMRC more efficiently.

The new digital system will be implemented in stages from April 2018 to 2020, giving your business time to adapt. The transition will be easier for early adopters of online accounting software like QuickBooks and associated apps, which help you to keep digital records of your income and expenditure. HMRC will also develop free apps and software products for these purposes, but it is wiser to rely on a tried and trusted commercial software package such as QuickBooks.

By using QuickBooks you become accustomed to the routine of frequently entering tax data into the software, where it is compiled and organised for you to submit. QuickBooks makes this process simple by prompting you to add any missing data and by compiling it in such a way that you or your accountant can easily submit it to HMRC’s digital tax system.

HMRC will begin testing the digital reporting feature with small businesses before the end of the year. They also intend to authorise certain accountants to manage their clients’ digital tax accounts this year. By early next year you will be able to report secondary sources of income through your digital tax account and by the end of next summer you’ll be able to update both income tax and National Insurance contributions via your online accounting software. This incremental process of feature deployment will continue over the next four years, until the digital tax system completely replaces the current one.

Action for Accountants and digital tax

If you already use a solution like QuickBooks to manage your clients’ accounts then it’s time to make sure they understand this and know which information they need to enter and which you will deal with for them. You can prepare for the switch to digital tax by informing your client that in future all their earnings, expenditures and payroll information must be entered electronically. By encouraging them to make this a part of day-to-day office routine, you ensure a smoother transition later on. They need to forget the notion of annual tax returns and get used to updating tax closer to “real time”. Your clients will be able to see their own tax calculation and due dates via their digital accounts and will have a greater understanding of where they stand in relation to tax obligations.

Make sure that your clients also understand that although the new system will make monitoring, calculating and paying tax easier, it will still be their responsibility to ensure that their tax bills are correct and to inform HMRC about information that is not reported elsewhere. If your clients aren’t particularly tech savvy and find this all very confusing, then you can reassure them by clarifying which tasks you, as their accountant, will be responsible for.

The new system will make it much easier for the self-employed to complete their tax returns, but businesses and those with multiple sources of income are more likely to use an accountant and will therefore continue to do so under the new digital tax system. The shift is not likely to affect these kind of clients significantly, since their accountants do all the work, but they must be made aware that the way tax is calculated and reported is going to change.

For more on digital tax, keep checking back for more information on the Small Business Centre