Will digital tax put people off starting a business?

Businesses are either finding the process of digital tax compliance foreboding, or don't even know what it is. Could this be a serious deterrent to start a business?

The upcoming digital tax proceedings mean that all business owners in the UK will be required to make submissions online – but there is evidence that many small business owners are not sure what the process to follow is.

Such changes, and additional administrative requirements, may put people off starting a business, according to Lee Murphy, founder of Pandle. He points our that, historically, new enterprises have not been forced to complete bookkeeping for a year to 18 months after starting to trade, unless they register for VAT.

‘However, the digitisation of tax will force business owners to learn more about how their business works, and give them much more control and insight into their finances,’ he adds.

HMRC has said that it doesn’t plan to develop the software necessary to make submissions digitally; so to future proof your small business the best way business owners can prepare is to migrate over to reputable accounting software in advance, says Murphy.

‘Rather than waiting to the end of the year to get your accounts in order, SMEs need to start now, especially considering that the transfer over to accounting software may take some time to complete and could even break the deadline if submitted too late,’ he says.

Communication breakdown

Ralph Cochrane, founder of Creative Grid, says that the [FreeAgent] statistics which show 43 per cent of small business owners and freelancers don’t know what ‘Making Tax Digital’ is not a surprise. ‘I don’t recall a single piece of correspondence from HMRC other than the adverts or mentions during George Osborne’s Budget last year,’ he says.

Cochrane says that since currently, tax is calculated annually, any mistakes can be disastrous – a miscalculation can result in a rebate which isn’t flagged as erroneous until the next year. ‘By then the finances may have been spent and by the time the resulting tax bill is issued, it could be great enough to put the company out of business,’ he says.

Technology has a huge role to play in digitalising tax; using accountancy software is already simplifying Cochrane’s bookkeeping ahead of the changes in legislation. ‘I already have a clear overview of my finances in real time, whether in the office or on the road, so my preparation for digital tax is well underway, despite the lack of correspondence on the matter.’

Cochrane realises there will be many small business owners who aren’t prepared for the upcoming changes and this is where the accountancy industry needs to step up, he feels.

‘With technology continuing to evolve, accountants aren’t being hired for bookkeeping services alone. Instead, they must become strategic financial advisers, ensuring their clients are prepared for digital tax. If correspondence isn’t coming from HMRC or accountants, businesses will struggle to cope.’

Further reading on digital tax

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