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In March 2015 the Chancellor, George Osborne announced an initiative which will see a major leap in the modernisation of the tax system, by way of the development of ‘digital tax accounts’. This change may lead to a reduction and potentially signals the end of the Self-assessment tax return as we know it.

What does it mean for individuals?

The initial proposal suggested that by 2016 all individuals will have their own online ‘Personal Tax Account’. The online account will hold information from third parties, such as employers, pension providers and banks. This information will be updated on a regular basis.

An individual can login into their own online secure account and review, update and check the information held.

The benefit to the individual is that all the information held will be in ‘real time’. This will enable the individual to monitor the amount of tax due at any given time. Additionally, repayments will be identified early and steps can be taken to reclaim this over the remainder of the tax year. The whole system is deemed to make it easier to file, pay and update your tax information online at any time.

An individual will be able to authorise their agent to monitor and review their ‘Personal Tax Account’ on their behalf.

However, on the contrary to this, the automatic system may not apply certain tax reliefs where applicable, due to the specific eligibility guidelines, therefore many individuals who may enter their information and may think it as a more cost effective way to do so, may not claim all of the tax reliefs available. This is particularly relevant for capital gains disposals and the application of tax reliefs such as rollover or entrepreneurs relief. Thus for those who do not seek advice, this ‘easy’ option could prove a less cost efficient option.

What does it mean for businesses?

The initiative is for businesses to be able to link their business accounting software to their personal online tax account. The Government has announced that compatible software will be free of charge to small businesses. For some ‘small businesses’ this may be their first experience of reporting their business activities on accounting software. Additionally, the software may not be suitable for all businesses.

Businesses will be required, although full details are yet to be disclosed, to submit ‘summaries’ of their income and expenditure on a quarterly basis through their online account.

It is anticipated that small, non-VAT registered businesses and landlords will be required to make submissions for accounting periods starting after April 2018. All VAT registered businesses will need to be compliant from April 2019 and companies from April 2020.

Advantages to small business

The quarterly reporting will enable small business to plan more effectively and manage cash flow. There will be an option for businesses to align all taxes and pay on a quarterly basis.

Disadvantages to small business

Further compliance in respect of filing accounting information

Tax reliefs which the business may be eligible for may not be automatically applied due to the specific rules for eligibility

Time and resources in producing further data for reporting purposes

Overhaul of current accounting processes in order to comply with new regulations

Quarterly reporting is unlikely to take into account certain tax adjustments, such as capital allowances, private use adjustments. These adjustments can make significant differences when calculating potential tax liabilities. This could result in under or overpayments of taxes, thus overriding the reason for real time reporting.

Therefore the long term proposal for a new tax system, which aims to make it easier for all taxpayers — individuals and businesses — to manage their tax affairs and pay the right tax at the right time, should be promising from a cash flow perspective, although it may not be as cost effective as initially suggested, as there will undoubtedly still be a need to check and apply for specific tax reliefs where available.

If you are using the new personal tax account, and you would like to seek advice on any forms of tax relief that the online account is not currently applying, please do not hesitate to contact the team at Spirare.