We increasingly rely on technology, both at home and in the office, to make our busy lives more manageable. Over the next few years, HMRC proposes to ‘bring this digital revolution to Whitehall’ and simplify tax administration by digitising the existing tax system.
What will change
Businesses will need to update HMRC digitally, and on a quarterly basis regarding their income and expenditure - bringing an end to the annual tax return. Contrary to misconception, this shift won’t equate to four tax returns a year. The quarterly updates will be a matter of uploading and submitting data generated from record keeping software. The introduction of digital tools may still allow use of spreadsheets, but software will still be needed to process this information via HMRC’s portal. The new measures won’t involve the complexity of a full year tax return, and is hoped to be much quicker to complete than the current system.
Another objective will be to give users visibility of their finances as they go, highlighting how much tax they will need to pay at the end of the year. From HMRC’s perspective, these more frequent submissions will improve accuracy and provide them with the insights needed to tackle underpayment and tax evasion more effectively. With a tax gap in excess of £8bn due to avoidable taxpayer errors, it’s an obvious concern.
The roadmap has been subject to scrutiny in recent months, but at present, the Treasury Committee has announced that from 2019 those businesses with a turnover above the VAT threshold of £85,000 will need to keep digital records, but only for VAT purposes. Businesses will not need to keep digital records, or to update HMRC quarterly, for other taxes until 2020 at the earliest. This delay will allow more time for smaller businesses to prepare, as well as for overall testing of the system, with pilots scheduled for Spring of next year.
Indeed, more time to prepare will be key, when you consider that two thirds of all small businesses not using any type of accounting software to manage their finances. So how can accountancy practices best prepare themselves and their clients for this transition?
Run an audit to understand which clients are already using accounting solutions and which are still using shoeboxes to record incomings and outgoings. Despite the enormity of the change, and the current timetable, over half of accountants still haven’t spoken to clients about the impending legislation.
The race is on and accountants must plan ahead in order to incorporate strategic changes to their operating structure aligned to the legislation. They must position themselves as trusted advisors for existing customers and new prospects in order to stay competitive. However, as accounting firms may now need to work with smaller businesses up to four times a year, they will also need to carefully consider how they offer these services to ensure they remain profitable.
Whilst it may seem that technology is omnipresent, there are still many among us without basic digital skills. In fact, according to the Lloyd's Business Digital Index, this accounts for over a third of SMEs in the UK.
It is likely that government-led support will be given to those lacking computer literacy, but this is yet to be defined. However, it will unfold, there is an opportunity for accountants to help up skill and educate clients on getting to grips with IT in order to make the transition less daunting. Therefore, think about what additional support staff you may need. This might involve hiring an external advisor to run training courses, or offering free phone consultations.
Using the right software
Businesses will need to use cloud based software which can comply with HMRC’s digital platform. There will be at least 12 months before late submission penalties will be applied, however these digital summaries will need to be filed within a month of each quarter so automated solutions will be essential. At this time, the technology deployed should offer certain features to make this transition as smooth as possible, rather than adding further complexity. Therefore, look for a solution with a simple user interface and available on a mobile app to enable users to easily capture invoices and receipts on the go with their mobile device.
Choose software to drive as much value per pound of investment as possible and which will generally improve accuracy, reduce costs and speed up processes associated with traditional bookkeeping and manual data entry. For instance, certain tools leverage data analytics which enables users to capture details including tax summaries, and if requested, full line item details including description, quantity and unit price. Some solutions also remember how you categorise expenses including the relevant supplier account, nominal account and tax code; and can even match invoices to purchase orders. Adjusting to the legislation may involve extra costs at the start, so look for a service provider which offers a fair and flexible pricing plan - preferably one which enables users to only pay for the documents uploaded and doesn’t tie you into costly monthly subscriptions.
When using any cloud-based solution, and especially for the first time, data security for your practice, employees and clients must be a top priority. Therefore, a platform which offers robust user authorisation and authentication protocols and policies is critical.
Whilst the move to Making Tax Digital may seem daunting, it heralds a new era for businesses, enabling them to cut costs and drive efficiencies through automation. However, despite the delay, time is still at a premium and businesses must prepare for change now. Making Tax Digital represents a golden opportunity for accountancy practices to advise clients on how they can successfully make the transition. Ultimately, it will enable accounting firms to develop services and grow their practice in order to provide tax and business planning throughout the year, rather than the once fraught, January rush.