Making tax digital for businesses

Small Business Guides

6 min read

Reporting taxes just once a year is on its way out. Businesses will need to start making quarterly tax submissions from 2019. Although it may mean you have to make changes, it can actually help streamline tax and accounting.

Making tax digital summary

In a bid to simplify tax reporting, Her Majesty’s Revenue & Customs (HMRC) is moving away from only filing taxes annually. Instead, businesses will submit tax information – such as revenue and expenses – every three months.

For this reason, businesses will be issued with a digital tax account. Some of your business information will flow automatically into your digital account, including:

  • some bank data

  • information from other government departments

That makes things simpler. However, you’ll be required to check this data every three months, and provide any additional information that HMRC requires. Businesses who submit quarterly VAT reports will already be familiar with this way of working.

When will HMRC make tax digital for businesses?

Making tax digital will be introduced in stages.

  • From April 2019, businesses with a turnover above the VAT threshold will have to keep digital records for VAT purposes.

  • From 2020, businesses may be asked to keep digital records and update HMRC quarterly for other taxes.

The good news

One of the main advantages of making tax digital for businesses is that it will lessen the chaos surrounding annual tax returns. Here’s a brief summary of making tax digital benefits:

  • De-stressing tax
    You’ll submit tax data every three months, which means you can forget about cramming twelve months of work at the end of your financial year.

  • Far less paperwork
    Computer software will make an automatic record of money coming into and going out of your business. You (or your tax advisor) will just check the data and update it to HMRC each quarter.

  • Fewer surprises
    Because tax will be calculated quarterly, there’s far less chance of a big bill building up. You’ll find out what your tax liability is every few months so nothing gets out of hand.

  • More chances of lowering your bill through tax planning
    Businesses that keep regular tabs on the tax they owe can make strategic decisions to lower their bill. You might make more retirement contributions or reinvest in the business, for example.

How come I don’t have to do paperwork?

Electronic data about your business will go directly to HMRC from banks, building societies, and other government departments. You won’t need to manually process this information for them. That’s perhaps the biggest benefit of making tax digital for businesses. If you set up a smart tax and accounting system, you’ll have far less work to do.

The bad news

There’s not much wrong with gaining greater visibility of your tax situation. For some businesses, however, there will be changes to manage. Here’s a summary of the issues you may have with making tax digital:

  • Compulsory use of technology
    By making tax digital for businesses, the HMRC requires you (or your tax advisor) to submit returns online, through either an HMRC app or online accounting software.

  • More reporting deadlines
    While VAT returns were already submitted quarterly, income tax and corporation tax weren’t. After Making tax digital takes effect, however, the single annual filing for income tax and corporation tax will be supplemented by four quarterly reports. 

  • Loss of privacy
    You may not be comfortable that some of your electronic transactions will be visible to HMRC. But you’ll be able to review the data and fix mistakes before it’s submitted.
By updating your accounts more often, you’ll be able to react faster to opportunities and threats in the business.

Will I need an accountant?

You don’t need an accountant for making tax digital. You can figure out your obligations and make your submissions on your own. However, a good accountant will make the transition much easier for you, because they will:

  • know the HMRC plan for making tax digital (including the implementation schedule)

  • be familiar with accounting software that simplifies making tax digital for businesses

An accountant will also be able to help you with tax planning – a strategy to help legally reduce the tax you pay. You can find an accountant that understands digital accounting tools on our advisor directory.

If you already have an accountant

Making tax digital may mean you see your advisor more often because they’ll be doing quarterly reports. Those reports will typically be faster and easier to prepare than your old annual returns – so you'll have shorter, more frequent bursts of activity.

The regular contact will allow your accountant to learn your business better. Use the opportunity to get more advice from them. There are many services they can provide besides tax.

Do I have to get software?

You won’t be required to get software but HMRC encourages it. If you take this approach, make sure it’s online accounting software. Desktop software hasn’t traditionally been able to submit tax online.

Online accounting software like Xero is designed to be user friendly and, as a bonus, it can also:

  • automatically calculate the tax you owe (including VAT and payroll tax)

  • pull transaction data straight from your bank, your invoicing software, or your POS system

  • update your transactions every day, allowing you to stay on top of bank reconciliation

  • create digital records of paper receipts just by photographing them with your mobile phone

And yes, accounting software is tax deductible.

Where do I start?

Don’t think of making tax digital as just another obligation. This is your opportunity to regularly check income, expenses and profit in your business – which will help you make better decisions. Take these three steps to help make the transition smooth.

  1. Figure out when you have to make your tax digital
    You can make your tax digital right now, if you like, and there’s no reason to wait till the last possible moment to do it. But you need to know when it will become compulsory for your business. You’ll find a government timeline here.

  2. Consider online accounting software
    You don’t have to use online accounting software to comply with making tax digital but it might make things easier. And it will give you access to other powerful tools. Ask your accountant about online accounting software or read this guide to learn more.  

  3. Assess your accounting support
    Will you hire a tech-savvy accountant to help your business make tax digital? If so, start looking soon. They’ll be busy people during the transition period. You can find professionals who understand online accounting in the Xero advisor directory.

Making tax digital could be really good for your business

Change can often seem daunting, especially if it requires you to adopt new technology. However, quarterly tax filing could actually lessen your workload. And by updating your accounts more often, you’ll be able to react faster to opportunities and threats in the business.