“Tax doesn’t need to be taxing,” as the famous government slogan says.
However, this might not be true if you are still using paper-based processes. HM Revenue & Customs (HMRC) is steadily pushing small businesses, landlords and sole traders towards a digital-only approach to tax reporting.
Making that move can be a big undertaking, but many substantial benefits exist. Whether or not you are mandated to make the change to digital, taking this step could be transformational for your business.
Digital advancements
The UK government has made it clear it wants to become the world's most digitally advanced tax authority. This means converting all taxpayers to digital-only filing – and this change is already well underway.
HMRC wants to close the estimated 5.1% ‘tax gap’ – the difference between the amount of tax it expects to collect and the amount actually paid.[i]
In 2020, the government set out a 10-year plan to improve tax collection and administration, with digitisation playing a key role through its ‘Making Tax Digital’ programme. VAT has been digital since 2019, with all VAT-registered businesses required to file online returns since April 2022.
Since 2019, 13 million VAT returns have been filed digitally with 1.5 million businesses signed up to file online. Nearly half (44%) of businesses that were not mandated to sign up did so anyway, according to HMRC.[ii]
The attention of HMRC and the Treasury has now turned to income tax.
From April 2024, all unincorporated businesses and landlords with an annual income of £10,000 or more must file digital returns on a quarterly basis. This covers an estimated 3 million sole traders and 1.3 million landlords and property businesses, with general or ‘simple’ partnerships coming into scope from April 2025.[iii]
HMRC estimates that approximately half of this population is already using digital tax software[iv] – but this still leaves a huge population of small businesses that need to embrace digitisation.
Embracing the change
This may sound like a lot more work – particularly the prospect of moving to quarterly reporting.
But digital tax still doesn’t need to be taxing. In fact, it can bring real benefits.
A streamlined and efficient digital accounting system can not only ensure you have all the right information in place when filing returns, but it can also enhance visibility over payments.
One of the benefits emphasised by HMRC is the ability of companies to plan and budget for tax bills.[v] In addition, digital records can give business owners and finance departments a clear view of a company’s position in real time.
The first step towards this is to roll out digital record keeping. Income and expenses should be recorded in a digital format that can be easily loaded into HMRC’s systems or compliant software.
(Soon, this won’t be optional: HMRC already requires certain types of data related to VAT to be stored digitally, and it is likely to require similar digitisation for income tax information.[vi])
Next, get ready to be able to file quarterly reports. What data do you need? When do you need it? How is it recorded? Getting these processes in place promptly will ensure that this regular process becomes simple and efficient, ready for returns to become mandatory.
Finally, organise how these quarterly reports will inform your final declaration. Ensure this process is as seamless as possible to reduce the risk of errors.
How automation can help
At Quadient, we offer several payments and accounting systems that incorporate automation technology. These services are designed to streamline processes while also reducing the risk of errors.
Our software-as-a-service approach allows gives you greater flexibility over how you use our products, and ensures you get the latest updates automatically as soon as they are ready.
With quarterly reporting on the horizon, the automation of repeatable accounting and tax tasks will make reporting more efficient and robust, taking up less time and allowing you to focus on your business’s core strengths.
As you prepare for digitisation, your business will benefit from a system that is efficient, consistent, accurate and predictable.
[i] Source: HMRC ‘Tax gaps: Main findings’, 23 June 2022.
[ii] Source: HMRC/Federation of Small Businesses, FSB online event ‘Making Tax Digital – what small businesses need to know’, 21 February 2022.
[iii] Source: HMRC ‘Check when to sign up for Making Tax Digital for Income Tax’, 23 September 2021.
[v] Source: HMRC ‘Case studies for Making Tax Digital’, 7 July 2020.
[vi] Source: HMRC ‘VAT Notice 700/22: Making Tax Digital for VAT’, updated 1 April 2022.
