Digital tax shock as 65% of firms lack accounting software
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GOVERNMENT plans to make all businesses file tax returns electronically every three months face an uphill struggle – with two-thirds of small businesses not even using accounting software to manage their finances.
The finding emerged in a study by UK200Group, a membership association for independent accountants and lawyers. Members reported that 65 per cent of their clients do not use accounting software.
With Revenue & Customs’ Making Tax Digital project due to come into force next year, UK200Group, whose members service about 150,000 small and mediumsized firms, has found only 35 per cent use software, such as Sage, Xero or Cashflow. Though they do not yet report tax quarterly, as they will have to do by 2018, the transition should not be too expensive or time-consuming for these businesses.
A further 27 per cent use basic computer programs such as spreadsheets for book-keeping, but will need to adopt a full accounting package to make them compatible with the Revenue’s plans. Facing an even bigger change are the 22 per cent who are used to manual record-keeping, who will need to train a member of staff to input data into a new software system.
But the greatest shock will come to the 16 per cent of business owners who use what UK200Group calls the ‘shoebox method’ – those who do nothing to record transactions and their accountant fills in the detail before their annual tax return.
Richard McNeilly, chair of the UK200Group digitalisation taskforce and managing partner at accountancy firm Dains, said: ‘The shoebox method users will have to learn how to keep records, invest in software and then spend time inputting the data they collect into it.
‘Making Tax Digital represents the single most significant change to the UK’s system of taxation in recent times, and many of our smaller business clients are simply not ready for it.’
He added: ‘If the Revenue stays committed to having businesses report and pay tax digitally by 2018, small firms have only a short time to update their systems.’
With concerns that the new pressures on tax reporting will hit small businesses the hardest, as they are less likely to have accounting software and an appointed finance director, UK200Group has recommended changes. These include a longer timescale for implementation and a consultation on the future design of the tax system.
Andrew Tyrie, chairman of the Treasury Committee of MPs, has written to Jane Ellison, Financial Secretary to the Treasury, and Mike Cherry, chairman of the Federation of Small Businesses, about the compliance cost of Making Tax Digital.
The FSB has estimated digital record keeping and reporting will cost around £2,770 per year per business on average, while the Government impact assessment puts the transitional cost at £280 per business.
Tyrie said: ‘At least one of them must be wrong. If the FSB are right, the effects of MTD would be crippling for small businesses. If the Government are right, businesses have something to gain in the longer term and one would expect them to be queuing up to join the pilot.’
The Treasury says it loses out on £8 billion a year due to ‘avoidable errors’ by small firms.