Making Tax Digital

Welcome to the first blog post on the new External Accounts website!

Back in March 2015 it was announced that annual tax returns were to be scrapped, “Hooray!” I hear you say, but things are never as simple as they seem.

The process as a whole is still under consultation and will not come into play until at least next year, but a decision is to be made following the EU Referendum.

What they are trying to do is to ensure every tax payer has an online digital account. The regime is designed to enable individuals and businesses to upload information themselves to HMRC quarterly via a smartphone or tablet app. I can see the appeal, the majority of us use apps of some description for most of our online presence. However, I think the government are thinking about this too simply, although in their minds this will save taxpayers around £400m in costs.

In the nicest possible way, a small business owner does not necessarily have the knowledge to know what information to upload, nor how to compute profits in accordance with UK taxation or financial reporting requirements. I certainly do not try and fix my own car when it breaks down, I leave that to the guys with experience. I think this is a similar scenario.

Some of us in the accountancy profession see the opposite of what the government are expecting, with clients asking us to assist more with these quarterly filings rather than just once a year as we have been used to previously, clearly this will not be a cost saving to you, the tax payer.

An ICAEW study recently suggested that 75% of all businesses and 82% of sole traders would need to change their record keeping systems to provide useful information. How can this really save costs? Most small businesses also operate on a cash basis, meaning cash received less cash spent, but UK accounting and tax legislation is based around the “accruals basis”, which ignores the timing of cash, but considers the timing of “the right to receive or pay cash”. This can be a complicated area for us accountants, so how can the government expect all tax payers to understand these concepts and apply them 100% accurately?

We are keeping a close eye on this and will provide updates as it develops, but please get in touch if you would like to chat about it.