It sounds like a bold idea - requiring millions of small firms to keep electronic accounting records and submit digital tax returns - but Making Tax Digital will give British businesses a clearer view of their tax calculations and modernise the tax system as a whole, just as similar systems have revolutionised tax collection around the globe.
The new system will mean businesses, including self-employed traders and landlords will be required to manage their tax affairs digitally, thus helping to avoid both underpayment and overpayment, as well as phasing out the need for annual tax returns for millions of people.
Facing £8 billion a year in losses from uncollected taxes, Making Tax Digital is a very welcome modernisation of the UK tax system.
As a small business accountant, we understand a change to the tax system may seem daunting or challenging. In response to this, our team are certified experts in Making Tax Digital and are fully equipped to help you adjust to the new digital process.
Changes brought on by Making Tax Digital will be introduced gradually, starting in April 2019, when unincorporated businesses, self-employed people and landlords with annual revenue above the VAT threshold of £85,000 must start paying their income tax digitally.
The program will be applied to VAT taxes in 2019, and in 2020 it will be extended to limited companies and corporations. All phases of the program will be extensively piloted prior to wide-scale implementation.
By 2020, those required to file under the system will be able to view their complete financial picture in their digital tax account, just as they do today through online banking apps.
The UK government says the program will provide convenience for businesses, which will be able to access records anytime rather than waiting until year-end to learn how much they owe.
Tax officials will process tax payments “as close to real time as possible,” making refunds quicker and preventing fines from accumulating on past-due payments.
The switch to digital will affect about 900,000 landlords, 1.6 million companies, 400,000 partnerships and 600,000 other businesses, according to research by The Financial Times.
The UK plan is part of a worldwide movement to digitise tax collection. Western nations have long allowed businesses and citizens to file electronically, though most have not made the process mandatory.
Governments everywhere are reforming burdensome tax compliance procedures, and the most popular reform is the introduction or enhancement of online systems, according to the World Bank.
Electronic systems are gaining in popularity as they add the ability to automatically populate fields.
Costa Rica, Indonesia, Malaysia, Peru, Vietnam, Zambia and a host of other countries have adopted systems with at least some automated features.
Digital filing is likely responsible for a worldwide decrease in tax toil. For businesses, time spent on tax compliance has declined by 8 hours to an average 251 hours a year, the World Bank says. The number of payments businesses need to make has also decreased.
In Europe, the digital movement is spreading to VAT taxes.
In 2005, the OECD created a universal electronic format that businesses in any of its 38 member countries can use for VAT filing.
So far, France, Luxembourg, Austria, Poland, Portugal and Lithuania have adopted it, and Germany, Ireland and the Czech Republic are considering it.
Belgium and the Netherlands are experimenting with their own online VAT formats, while electronic VAT filing is also available in Italy and Spain.
Digital tax collection could have a dramatic impact on developing countries, where noncompliance and fraud are serious problems.
In Tanzania, electronic VAT payments could increase the country’s annual revenue by almost $500 million.
In Uganda, automated tax collection has increased revenue by 167% in a single year. Additionally, Kenya expects a new electronic system to double its tax collections over the next three years.
Online filing is catching on because it makes tax computations easier and cheaper for governments and increases transparency, lowering the odds of fraud.
In a world where many countries are drinking from the pool of digitisation, the UK’s comprehensive changes strengthen the argument for such systems to be made mandatory worldwide. Don’t be fooled by the media hype surrounding change and the challenges that come with it - when the dust settles, programs like Making Tax Digital will be responsible for increasing efficiency and boosting tax revenue worldwide.