Small business owners should plan for a new digital tax regime

Is your business ready for the "Making Tax Digital" reforms that come into effect next year? In recent weeks, ministers have let it be known that they're likely to delay plans to move individual taxpayers to a fully digital tax system by 2020, but the government insists it will press ahead with the switch over for most businesses.

The government's tax digitalisation scheme was first announced in 2015 and aims to move all taxpayers into online tax accounts, eliminating paper-based records and submissions in an effort to reduce tax leakage by £1bn a year by 2022. Businesses had been due to switch to a digital-only tax system last month, but the changes were put back by a year.

Nevertheless, from next April, any business with an annual turnover of more than the VAT registration threshold, currently £85,000, will have to begin managing some of its tax affairs fully online. Initially, the reforms will only apply to businesses' VAT accounts, but the rest of their tax affairs will also have to move online, possibly with effect from April 2020.

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Many self-employed people and businesses are already used to filing their tax returns online. But the new system will go much further, with requirements for all tax records to be maintained online too, in a format that HM Revenue & Customs (HMRC) is able to access. This will affect firms that maintain their tax records in paper-based files, or in spreadsheets such as Excel, and then transfer their final calculations into online return. They will have to invest in HMRC-compatible software to shift this process into digital tax accounts, and then get used to operating in this way.

For this reason, it's important that small businesses in particular start to plan for the shift now. The new system will require them to work out which software is best suited to their circumstances and to have it up and running, at least for VAT management, by next April. By then, they will also need to have made any changes necessary to their book-keeping processes, so that the transition runs smoothly.

There are advantages to planning ahead for the new system. As well as avoiding a last-minute panic to comply with HMRC's systems, businesses will hopefully find digital tax accounts more efficient and cheaper to manage, particularly with the automated tools built into many software packages. It should also be possible to get a clearer picture of your tax liabilities on an ongoing basis, rather than having to wait until you've filed a return. And there should be less scope for under- or over-payments of tax that have to be resolved at a later date.

It may even be worth voluntarily shifting your income tax and national insurance processes to online-only processing from next April onwards. While ministers don't intend to make this compulsory until the VAT changeover is shown to be working well April 2020 at the earliest businesses that want to manage their affairs in this way will be allowed to do so.

Check whether you're exempt

It's worth being aware that the "Making Tax Digital" requirements coming into force next April will only be compulsory for businesses with an annual turnover above the threshold at which VAT registration becomes mandatory this is currently £85,000.

As a result, small firms and self-employed workers with sales below this threshold won't need to worry about the new system, though they may want to comply on a voluntary basis.

In addition to the exemption for businesses with turnover less than £85,000, taxpayers with special circumstances may also be able to claim an exemption fromthe new rules. People with certain disabilities, for example, may be entitled to continue submitting information manually. Businesses in rural areas with little or no access to broadband internet services may also be able to claim an exemption.

However, while the £85,000 threshold will apply automatically, business owners will have to apply formally for an exemption based on their circumstances the onus will therefore be on you to prove you need the help and HM Revenue & Customs is entitled to challenge your arguments. It is important to resolve this question well before the new system comes into effect.