Making Tax Digital in the UK and Across the World

By Nina Kingsley, VAT Manager, Radius

Facing £8 billion a year in losses from uncollected taxes, the UK government is implementing a massive, multi-stage program to digitize payments. The initiative, known as Making Tax Digital, will help both businesses and individuals stay on top of their affairs and make fewer tax mistakes, the government says. The system will eventually spell the end of the annual tax return.

Changes will be introduced gradually, starting in April 2018, when unincorporated businesses, self-employed people and landlords with annual revenue above the VAT threshold (now £85,000, or about $105,000) must start paying their income tax digitally. The following year, the threshold will reach down to those with revenue above £10,000, though businesses unable to go digital will be spared from the requirement.

The program will be applied to VAT taxes in 2019, and in 2020 it will be extended to limited companies and corporations. All phases of the program will be extensively piloted prior to wide-scale implementation.

By 2020, filers will be able to view their complete financial picture in their digital tax account, just as they do today through online banking apps.

The UK government says the program will provide convenience for businesses, which will be able to access records anytime rather than waiting until year-end to learn how much they owe. Tax officials will process tax payments “as close to real time as possible,” making refunds quicker and preventing fines from accumulating on past-due payments.

The switch to digital will affect about 900,000 landlords, 1.6 million companies, 400,000 partnerships and 600,000 other businesses, according to The Financial Times.

Gauging Costs

The UK government has provided cost estimates for businesses to implement the program, though some groups dispute its figures.

Many businesses will need to upgrade equipment. According to government estimates, small businesses are expected to spend £330 million on computers, tablets or smartphones to meet digital recordkeeping requirements. Others will need to upgrade existing computer hardware. The largest business expense is expected to be the six hours an average company will need to spend learning the new rules. Businesses will also need to pay a collective £90 million in extra accounting costs. It will cost the average business £280 to set up the program, the UK government says.

A government Treasury committee disagrees with these figures, saying the measure will cost small businesses an average of £3,000 a year in time, salaries and accounting fees. Accounting group Smith & Williamson puts the cost figure for businesses at £2,000 a year. The program could put some companies out of business or lead them to avoid tax payments, the Treasury committee warned.

Eventually, the digital system will save businesses time and money. By recording transactions and expenses digitally as they occur, companies won’t have to go searching later for documents placed in separate files — or sitting in someone’s desk drawer or lost. After they’re up and running with the program, small businesses could collectively save £80 million a year in administrative costs, the UK government says.

Online Filing Spreads Worldwide

The UK plan is part of a worldwide movement to digitize tax collection. Western nations have long allowed businesses and citizens to file electronically, though most have not made the process mandatory. Governments everywhere are reforming burdensome tax compliance procedures, and the most popular reform is the introduction or enhancement of online systems, according to the World Bank.

Electronic systems are gaining in popularity as they add the ability to automatically populate fields. Costa Rica, Indonesia, Malaysia, Peru, Vietnam, Zambia and a host of other countries have adopted systems with at least some automated features. Digital filing is likely responsible for a worldwide decrease in tax toil. For businesses, time spent on tax compliance has declined by 8 hours to an average 251 hours a year, the World Bank says. The number of payments businesses need to make has also decreased.

In Europe, the digital movement is spreading to VAT taxes.

In 2005, the OECD created a universal electronic format that businesses in any of its 38 member countries can use for VAT filing. So far, France, Luxembourg, Austria, Poland, Portugal and Lithuania have adopted it, and Germany, the UK, Ireland and the Czech Republic are considering it. Belgium and the Netherlands are experimenting with their own online VAT formats. Electronic VAT filing is also available in Italy and Spain.

Increasing Compliance in Developing Countries

Digital tax collection could have a dramatic impact on developing countries, where noncompliance and fraud are serious problems.

In Tanzania, electronic VAT payments could increase the country’s annual revenue by almost $500 million. In Uganda, automated tax collection has increased revenue by 167% in a single year. Kenya expects a new electronic system to double its tax collections over the next three years.

Online filing is catching on because it makes tax computations easier and cheaper for governments and increases transparency, lowering the odds of fraud. Businesses can be sold on its convenience.

But in a world where many countries are merely dipping a toe into digitization, the UK’s comprehensive, fast-moving program stands out. If it works, it may serve as a beacon that inspires other nations to follow suit, increasing efficiency and boosting tax revenue worldwide. If it doesn’t, it will create a very public black eye.