Making tax digital

Posted July 12, 2019

Making tax digital

In recent years much of the world has moved online, and tax is no exception. With this trend away from traditional tax methods and towards a futuristic internet-based economy. It is important that everyone and anyone who seeks a future, that is in some way dependent or related to tax, which is to say just about everyone, must make the move and leap into this new world of taxation. Digital taxation looks set to dominate both business and individual taxes in the years and decades ahead, so familiarising yourself with it as best you can would be wise.

For younger taxpayers operating online is something that is practically in their DNA, yet older folk won’t be saved from the technological revolution. It’s a matter of if you can’t beat them join them. The taxation requirements although moving online, remain very complex and devilishly difficult. So, this blog will attempt to lay out in as simple terms as possible, how you can manage and navigate it as effectively and successfully as possible, in this new digital taxation era.

Accounting Software and Online Portals

One way in which many businesses now operate and pay tax is via online portals. These portals allow for information to be stored and access online often in real time, allowing the users to check and monitor their financial transactions and tax payments as and when they happen. The advantage of seeing all your actively live means you can make decisions quicker and respond to changing situations and events especially if there is an error or a problem and needs to be corrected fast. There are many different options and alternatives when it comes to online portals as new and improved technology becomes available and new competitors join the market. Many businesses are now expected to conduct their taxation digitally, for instance those that are VAT registered.

Making tax digital – What does it mean for you?

In April 2019, HMRC set out new rules for digital taxation, involving who must follow them and how. These rules set out that, most companies that have a turnover of more than £85,000 and are VAT registered must provide their taxes digitally with software or in a digital format that has been approved by HMRC. HMRC provide a list of criteria that you can check yourself and your business against, and a guide to the software and the acceptable digital format for the relevant taxpayers to use. This information can be found on the HMRC website. Filling your tax returns from compatible software is increasingly unavailable, although you can use bridging software to transfer your returns over to an acceptable software option. Furthermore, if you use more than one product of software to store records, all of your records must be digitally linked by March 2020, or September 2020 depending on if you are in the deferral group.

This means that all your tax returns and records must be digitally accessible and retrievable together online or on an electronic device assessable to HMRC. The digital link must be one of the following:

linking cells in spreadsheets
emailing records to your agent
putting records on a portable device to give to your agent
importing and exporting XML and CSV files
downloading and uploading files

You are required to keep the following information as part of your records in a digital format. Your records must contain the following:

Name of your business
VAT registration number
A record of VAT accounting schemes you are involved in
Details of the supplies your business produces and obtains

You will also need to keep a digital record of the amount of tax your business owes on sales or is able to claim as a business purchases. As with the amount of tax your business owes and is able to claim from acquisitions from other EU countries, or needs to pay on behalf of suppliers who use a reverse charge procedure. You will also need to keep a record of the amount of tax your business owes or can reclaim following changes to the records, i.e. errors or other changes.

Other obligations may apply regarding supplies, suppliers and third party business operations for more information click here.

In 2018 HMRC finalised and realised the changes introduced over 2019. These included the penalties and fines that HMRC will impose if tax in not paid on time and correctly. This new penalties system is not due to be introduced until a year after the digital tax changes have been introduced, this means the penalties will be introduced during 2020. The new penalty system will be based on a points similar to points on driving license, with a sliding scale of points depending on the type of tax and how many times you have received penalty points. Furthermore when a late tax payment is made you will also be required to pay a late payment charge with interest.

One way to avoid penalties and fines is to keep track of all your tax returns and records with QuickBooks. This system always to record all of your transactions and payments in real time and with the relevant VAT payments added automatically. This save you the hassle of having to make all the calculations and work out the VAT payments yourself and reduces the chances of mistakes and errors being made that could also incur penalties. Furthermore business could be able to gain an average of 4,400 turnover with QuickBooks, a major incentive for business to go digital the easy way.

With these changes to the tax penalty system in 2020, and the deferred groups being added to the digital tax requirements in October 2019, it is clear the digital tax revolution transition is quickening and here to stay.

If you would like more information about the tax system and how it is changing, please contact Contractor Unlimited, whose Warrington accountants will be able to answer your questions and respond to your quires with expertise and experience in this field.