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  • Paul Clifton

Digital tax accounts

Making Tax Digital accountant in Leeds

The government has announced that by early 2016 five million small businesses and 10 million individuals will have access to their own digital tax account, and that by the end of the next parliament every individual and small business in the UK will have one.

The theory

The digital accounts will be simple, secure, personalised to the taxpayer and accessible through the digital device of their choice. The government has also said that it plans to transform the tax system but will consult on the details in 2016. The chancellor has highlighted that most businesses, self-employed people and landlords will be required to keep track of their tax affairs digitally and update HMRC at least quarterly via their digital tax account.

The chancellor's stated aim is to transform HMRC into one of the most digitally advanced tax administrations in the world, with access to digital tax accounts for all small businesses and individuals by 2016-17, delivering an additional £1bn of tax revenue by 2020-21 and sustainable efficiencies. This is all under the banner of tax simplification for businesses, yet so far there seems to be minimal detail on any true tax simplification measures to support businesses and reduce cost. The measures highlighted seem to suggest more regular quarterly reporting responsibility for businesses and an implied acceleration of tax payments by business to the government. Businesses will have one tax reporting date replaced by four. There is, however, benefit for business in being able to access a digital tax account and presumably manage all taxes and correct HMRC errors.

The practice

In practical terms, employers, banks, public companies, property landlords and businesses will be expected to update H M Revenue & Customs more regularly regarding payments made by them for employment income, bank interest, dividends, rental income generated and business profits earned.

Once at the end of the tax year, on 5 April or shortly thereafter, most of a taxpayer’s sources of taxable income will have been uploaded to their digital tax accounts. The taxpayer can then add any extra sources of unrecorded taxable income and gains and then approve the amounts in their tax account.

Certain income and gains may not be uploaded to the digital tax account e.g. dividends received from private companies or capital gains arising from the sale of shares, property and other investments.

The above mentioned digital tax accounts will replace the need to file an annual Self-Assessment Tax Return.

Many of our clients may be asking if they still need an accountant, if they have a digital tax account. The accountant currently collects all sorts of details including amounts of taxable income. It is expected that most of the details will be automatically uploaded to the individual taxpayer’s tax accounts by the payers of each source of income. It is true that this will save the accountant time and in some cases would require less work by the accountant.

We are maybe a little biased, and maybe with good reason. Would you trust the information uploaded to your digital tax account by others? Would you trust H M Revenue & Customs to ensure the information held in your digital tax account is complete and accurate?

H M Revenue & Customs have great ideas to make the digital tax accounts the most advanced tax collection system in the world…. but they cannot even answer their telephones within 30 minutes or open their post for 5 or 6 weeks.

However, for most of the business clients of this firm, our clients will also be the providers of information for their own and others’ digital tax accounts. Our clients will be:-

  1. Self-employed and therefore generating details of their self-employment income and expenditure and profits and losses

  2. Directors and shareholders of their own company generating details of their salary and dividends paid

  3. Landlords generating details of their rental income and expenditure and profits and losses

There is much talk of accounting and recordkeeping systems interfacing with those of H M Revenue & Customs through API (Application Programming Interfaces). APIs is just a fancy word for providing a link between your accounting software e.g. Sage software and that of the H M Revenue & Customs database. Does this mean that all our business clients must now buy, rent or pay for electronic recordkeeping or accounting software to link and upload quarterly data to H M Revenue & Customs? Many of our clients use Excel spreadsheets for recordkeeping and they come in all sorts of variations. Is Microsoft going to create an API for is Excel software to link with H M Revenue & Customs? Does this mean the nail in the coffin for the humble book, ledger or pile of receipts stored in a carrier bag?

Having spent well over a quarter of a century helping smaller businesses with their compliance responsibilities, recordkeeping and accounting systems I think that it is rare that a small business can maintain its records correctly and at the same time use them to show what profits it has generated to date. They need their accountant to pull their records into shape and make many year-end adjustments.

We can see more work being required by the providers of information i.e. the employers and business clients of this firm. H M Revenue & Customs are talking about uploading more data and more often e.g. 4 times a year, each quarter end, rather than the annual set of accounts. A 5th submission will be required for post year-end corrections and accounting adjustments. This is supposed to help the taxpayer have a better idea of their tax liability throughout the tax year, rather than just at the tax year end. This may be great for some employees and taxpayers, but not for the poor businesses and information providers.

In short, we do not see any less need for an accountant in the future. In fact, we see more work being required by our clients and more frequent updates with H M Revenue & Customs. We may lose some smaller Tax Return work, but we’d expect to gain more work in keeping H M Revenue & Customs updated.

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