Rory Kennedy: Will making tax digital help small firms?

Small firms face a 'disproportionate burden' under the new digital tax rules, says Chiene + Tait partner Rory Kennedy. Picture: Pixabay
Small firms face a 'disproportionate burden' under the new digital tax rules, says Chiene + Tait partner Rory Kennedy. Picture: Pixabay
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HMRC’s “tax simplified” initiative is a typical Orwell doublespeak. Under the guise of simplification, the organisation is forging ahead with its Making Tax Digital (MTD) programme – its biggest transformation in 20 years.

Unfortunately, it will place a disproportionate bureaucratic burden on smaller SMEs to prepare quarterly reporting.

The initiative had a rushed consultation and there is a lack of clarity

While large businesses often see accounts as a management tool, many small businesses see accounting and tax compliance as an annual chore in which they produce a bin bag of receipts for their accountant in late January.

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The government seemed to agree that SMEs should be chosen as the first targets of MTD after HRMC argued they present the highest risk of “tax leakage” due to poor record-keeping.

The new system will see the end of the tax return for all businesses and the self-employed with an income of over £10,000 per annum. They will instead be required to maintain digital records using software that must dovetail with HMRC’s systems, raising compatibility concerns.

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Those who run a business with fluctuating profits should look at the proposals carefully to understand how to provide meaningful financial reporting figures for MTD.

While this new system requires companies to report every quarter, the information will not actually form part of the end of year calculation of tax liabilities and currently there are no penalties in place for inaccurate reporting.

This raises the question of whether businesses could simply file random figures during the course of the year and then submit an accurate annual return – no more of a burden than the current system. You can’t fault HMRC for joining the digital revolution. But the initiative has had a rushed consultation and there is a lack of clarity.

Westminster’s Treasury committee has recommended a delay in the roll-out of MTD and a rise in the threshold, but it is unclear if this will happen. It is therefore important for SMEs to ensure they are making suitable preparations.

Despite HMRC’s apparent commitment to making tax “simplified”, the indications are that it could complicate matters. Let’s hope that, as this initiative is rolled out to cover other areas including VAT, we’ll see less doublespeak for many within the small business community.

Rory Kennedy is a partner at accountant Chiene + Tait

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