What you need to know about HMRC’s digital tax regime

The words ‘HMRC’ and ‘digital proficiency’ don’t exactly go together. However, the plan to bring the tax records of over 5 million businesses online is set to be one of the most significant tax regime changes in recent times.

What is the digital tax regime?

HMRC intends to replace the annual submission of Self-Assessment Tax Returns with a quarterly digital tax account submission and payment. The change will come into effect for all freelancers, landlords, contractors and small business owners by 2020.

This transition is long overdue, however the finer details are still being worked out and much of the system is yet to be made operational. The digital tax regime is currently being trialed in a number of areas and is expected to be phased in over the next four years.

How will the new system work?

Everyone who pays tax under the Self-Assessment system will be required to open an online account with HMRC.

This account functions in a similar way to online banking, with users able to register for new services, update information and make payments conveniently.

The taxman has stated that the new regime will be similar to the existing Pay As You Earn process for employees, which recently transitioned to a Real Time Information (RTI) reporting system.

However, many freelancers and contractors are concerned that submitting four tax returns per year will add to their administrative burden: a position anyone who has spent their Christmas compiling the annual tax return will understand.

How can freelancers and small businesses make the transition easier?

On average, the management accounts of small businesses are four months out of date[1]. This suggests that businesses may struggle to adapt to the new, more intensive regime.

Advanced digital accounting software, including Xero, can streamline the submission process and enable you to submit their returns at the push of a button.

The software can be synchronised with your corporate bank account, enabling you to import your transactions and assign them to invoices, bills and expenses. This generates a real-time profit and loss (P&L) that your accountant can review before you submit your tax return via the platform (the online HMRC account mentioned earlier can be linked to Xero). There is no difference in the amount of effort required for this method of tax return submission, whether it’s annual or quarterly. Four times a year does not have to mean four times as much work.

Keeping your digital accounts up-to-date also enables you to plan business development more strategically. Businesses with accurate financial records have been found to grow twice as fast as companies whose records are nine months old¹ (as is common with current analogue submission methods).

If you want to find out how advanced accountancy software can help streamline your tax return submission process, call on the experts at 3 Wise Bears.

[1] smallbusiness.co.uk/digital-tax-is-coming-what-small-businesses-should-expect-2528921/