The upcoming digitisation of the tax reporting system could mean that millions have to file five tax returns a year. The overhaul, called ‘Making Tax Digital’ starts its pilot trial in the 2017/18 tax year, with people being gradually drawn into the system over the following two years.
Why is tax going digital?
In the ‘Making Tax Digital’ Policy Paper, H M Revenue & Customs (HMRC) states that the new system will save businesses and the self-employed time and money by keeping track of information and fixing any errors in real-time. This means that taxpayers won’t have to supply HMRC with information it already has, theoretically putting an end to long and complicated tax return forms.
Whilst the new system is designed to save time and money, many aren’t happy with the impending overhaul, claiming that it will add to their workload significantly. The mechanics of a digital tax system will mean that the following returns will need to be filed each year:
• Four quarterly returns
• One annual ‘finalising’ return
• Four additional returns for those whose turnover is above the VAT threshold of £85,000
This would see a minimum of five tax returns being filed each year, with those above the VAT threshold having to file nine.
Richard Murphy, Professor of International Political Economy at City University, London, suggests that one of the aims, which is to target tax avoidance and collect more revenue, could contradict itself entirely. He commented: “A greater number of deadlines would lead to more rushing and more mistakes as people put in any old figure to meet the deadline.”
Who will be affected?
The new system will affect mostly the self-employed and landlords, but employees who pay their tax via the PAYE system will be affected if they have investments that provide an annual income over £10,000. The fact that the minimum income limit doesn’t match the tax-free personal allowance of £11,500 means that those close to the £10,000 income mark may want to take extra care to avoid sanctions for unintentionally failing to file a return.
A pilot will be conducted for the 2017/18 tax year, and businesses with a turnover over £85,000 will be drawn in for the 2018/19 tax year. As announced in the 2017 Budget, those with a turnover below this will then be drawn in for the 2019/20 tax year, giving them an additional 12 months to prepare.
How much will it cost me or my business?
HMRC estimates that the average cost per business will be £280, but as the system becomes more established, it will save them considerably more than that over time. Numerous industry representatives have disputed this, and Tina Riches, a partner at accounting group Smith & Williamson has suggested that the average initial outlay will be closer to £2,000. This factors in the cost of training for the new system, plus administration and IT costs.
The Government has stated that most small businesses will need to upgrade their IT equipment to comply with the new systems, with an estimated £330 million expected to be spent on computers, tablets and smartphones. The software hasn’t been distributed yet, so it is not currently clear what the IT system requirements will be.
What if I can’t go digital?
‘Making Tax Digital’ plays a major part in HMRC’s vision for 2020, with an entirely digital system replacing the current one. You can’t opt out of the digital system, but HMRC state in their policy paper: “there is no question of forcing those who cannot go digital to do so. HMRC will ensure that there are alternatives for those who genuinely need them, and help will continue to be available for businesses who want digital support.”
The digital overhaul could save the UK £8 billion a year from uncollected tax and save money and time for those who file accurate returns. That being said, many are nervous about the new system, and many concerns are being raised. HMRC has got 12 months to distribute the necessary software and teach taxpayers how to use it, so only time will tell whether or not ‘Making Tax Digital’ will make it easier and faster for the self-employed.