HMRC’s initiative titled “Making Tax Digital” means that most businesses and landlords will be required to submit a quarterly tax return together with their usual annual tax return. Here’s everything you need to know…

Who is affected?

Every business, landlord and small company with income over £10,000 will be caught under these new rules, but the dates are staggered according to the size of your business activities, as follows:

  • Businesses and landlords who aren’t VAT registered will have to submit quarterly tax returns from April 2018
  • Businesses and landlords who are VAT registered will need to submit quarterly tax returns from April 2019
  • Small companies (micro entities) will need to submit quarterly tax returns from April 2020.

What needs to be submitted to HMRC?

A simplified tax return will need to be submitted every three months to HMRC, together with an annual declaration.  For smaller businesses this can be prepared on a cash basis, which simplifies this process.

What can I do to prepare for this?

The first big challenge for many businesses, especially those that aren’t VAT registered, is going to be keeping their records up to date every three months rather than doing this once per year. There have been significant advances in book keeping software over the past five years and these can help with this administrative burden.

Cloud based packages such as Xero will extract your bank statements directly from your bank to save you recording every payment and receipt. It will even allocate transactions automatically based on the rules you set. Another advantage of cloud based systems is the ability to allow your accountant to login and make changes, rather than sending backups via email. Having up to date information and making book keeping as quick as possible is going to be essential to meet the increased number of HMRC deadlines.

The second challenge is whether your accountant is prepared for this – this is a massive change for the accounting profession and its impact can’t be underestimated:

  • They need to be familiar with cloud based book keeping systems such as Xero to ensure they can keep your records on track.
  • They need to ensure their tax return submission software complies with HMRC’s systems and includes appropriate controls and checks to ensure no tax return filing deadlines are missed.
  • They need to have staff cover for holidays, sickness etc. And be prepared for this increased workload – coping with four extra tax returns for every client will require planning.
  • Lastly, what do they propose to charge you for this extra work? No doubt there will be increased staff costs and software costs across the profession. Having the right book keeping system will help to keep your accountancy costs down, but your accountant needs to be proactive and advise you on the benefits of each cloud based system.

What about tax payments?

At this time, HMRC are not going to ask for tax to be paid quarterly. However, it will be possible to make voluntary payments based on your quarterly tax submissions.

Although I expect this will change in the future and quarterly tax payments will be based on your quarterly tax submissions. This will increase the importance of accurate submissions and may lead to cash flow difficulties for seasonal businesses.

In conclusion I encourage everyone to review their current book keeping system and talk to their accountant about how to prepare for these changes. Armstrong Watson are already preparing for this change and implementing software changes to ensure all of our clients meet these new requirements.