More than two million UK SME owners risk non-compliance penalties in digital tax overhaul due to the Making Tax Digital (MTD) for VAT reform coming into force in 2022, according to research from the Accountancy Partnership.
The Boom or Bust report by The Accountancy Partnership revealed that more than a third (37%) of entrepreneurs use paper-based systems or a collection of photos to keep track of their finances, with one in 10 storing essential documents in an old shoebox or drawer.
As part of HMRC’s efforts to become more digitally advanced and to make tax easier for business owners, digital tax records will be mandatory for all VAT registered businesses from 1st April 2022.
As well as digital records, Making Tax Digital will require tax returns to be submitted every three months, as opposed to the current annual tax return. Over the next five years, MTD will expand to include income tax and corporation tax, as well as VAT.
The Accountancy Partnership managing director Lee Murphy said: “In this day and age, there are so many excellent digital record-keeping options available to business owners and freelancers that keeping paper or spreadsheet-based records should be a thing of the past. Records kept digitally will give SMEs a much clearer, accurate and more up-to-date picture of their finances and tax owed, which is why HMRC is going to enforce it from next year.”
“Our research shows that the new system is going to force millions of business owners to significantly change the way they keep their records, and if they are unfamiliar with procedures they could be at risk of fines once the new rules are in place.
“I would advise anyone who uses paper-based filing, spreadsheets or notes and photos on their phone to start acquainting themselves with digital procedures as soon as possible so they have grips on it before it is mandatory.
“Not only will this ensure future compliance, but it will also encourage entrepreneurs to keep better track of their expenses, which could bring tax benefits. Two-fifths of business owners say they have failed to claim expenses due to lost receipts and invoices, but digital record keeping will encourage people to stay on top of expenses, minimising the risk of losing receipts between tax returns.”
The full report can be read here.