Going digital: tips for taxes

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The way HMRC collects and assesses data for tax liability is changing.

The essential difference is that companies are required to keep digital records in a format that can be sent to HMRC.

“They will need these each quarter, in addition to a yearly round-up,” says Glenn Collins, head of technical advisory with professional accountancy body ACCA. “We’ve expressed some reservations about this – for instance, it’s likely to create costs for businesses. The key thing is to be aware it’s happening but also to bear in mind that it’s currently something of a moveable feast. Before you commit to buying software, wait to see what’s required so any purchases are compatible with the HMRC system.”

Why are these changes happening?

“My understanding is that HMRC are concerned that some businesses are not keeping records as fully as they should and so not reporting tax liabilities correctly,” says Anne Smith, tax partner at Watts Gregory. While it makes sense to move over to digital records – most of us are comfortable making spreadsheets and using our smartphones nowadays – there are security issues to be addressed. “By effectively making businesses record their income and expenditure on a virtually real-time basis, then report that quarterly, there are implications. It will be a learning curve, even if free software is on offer.”

 While the move towards digital is new, the pitfalls for businesses when filing their tax returns remain the same. There are several ways the astute SME and start-up can meet HMRC requirements – without spending more than you need to.

Avoiding the pitfalls: five key tips

1. Keep all your primary records

“Accountants are very adept at taking whatever you have in whatever format – although it’s always better if you also have all primary records available,” says Damian Evans, partner at EvansEntwistle. “The single biggest pitfall is the lack of bank or credit card statements.”

Also, Evans says: “The timing of information is important. It may seem like an unnecessary expense, but since accounts preparing is looking at business performance at its best, you get the most value from this by having accounts prepared as soon as possible after your year end. This assists with understanding profitability and with tax planning.”

2. Understand the rules

Anne Smith says many of the mistakes SMEs and start-ups make are due to their not fully understanding the finer details of HMRC requirements.

“Something that would be regarded as a capital or repair expenditure can be misunderstood, for example – make sure you know the difference.”

If you move from employment to set up your own business, bear in mind that the rules are different for self-employed people than those you might have been used to as an employee. “There’s a lot of confusion here on travel expenses, for instance – what you can and can’t claim,” says Smith.

3. Don’t miss out on benefits

The reverse side of this coin is that there are many tax-deductible claims you can make and forms of tax relief available that businesses often don’t take advantage of because they’re not aware of them.

“If you use your home as an office, you can claim relief on that,” says Smith. “Relevant subscriptions, books, stationery and advertising are all tax-deductible and are often areas that start-ups don’t think about claiming for.”

For limited companies, look at tax reliefs like those available for research and development, Collins adds. “Many firms think this only applies to big companies. Actually, many smaller limited companies undertake R&D and could claim those reliefs. But the onus is on the company to find out what’s available, see if you qualify and make sure you claim it.”

4. Don’t leave things to the last minute

Where many businesses go wrong is with timing payments.

“It can be confusing,” says Glenn Collins. “Penalties can be incurred either by paying the wrong amount or not allowing enough time. For example, if you set up a direct debit it might take three days for the payment to reach HMRC. That can trigger a penalty if you’ve left it until 31 January to file your accounts.”

Also, an HMRC bill usually includes an advance payment for some of the coming year as well as what you owe for the previous period. “That can make a dent in your cash flow just after Christmas. The key is to be prepared and work out your tax liabilities in advance.”

5. Decide what kind of business you want to be

If you’re a start-up, it’s essential to think about this because each type of business has different tax implications.

“There are essentially four types – sole trader, partnership, limited company and limited liability partnership. They all have advantages and disadvantages,” says Collins. “So before you start trading, assess your estimated turnover, likelihood of growth, how important limited liability is to you and what your financing requirements are – for instance, will you need outside investors? All this will help you decide the best structure for your business.”

The timescale

The current digital rollout timescale is income tax and National Insurance in April 2018, VAT in April 2019 and corporation tax in April 2020.

“These might get pushed back if it’s realised that smaller businesses can’t cope in time,” Smith suggests. Ultimately, “the good thing that will come from regular reporting is that businesses will have a much better sense of their finances over the year”. This will help you manage the business better, plan and prepare more effectively, and avoid any nasty surprises. “And that can only be a good thing.”

Evans Entwistle partner Damian Evans was interviewed for this article which originally appeared in Royal Bank of Scotland’s Content Live by Mark Blayney Stuart, copyright RBS.