Tax & admin · 18 January 2016

Insider expertise from Xero on the government’s transition to digital tax accounts

Gary Turner and Xero will be guiding businesses through the transition
Gary Turner and Xero will be guiding businesses through the transition

In response to confusion amongst the British micro and small business community regarding the upcoming quarterly digital tax returns, Business Advice asked Xero’s UK MD Gary Turner for more detail.

As a cloud-based accounting platform used by thousands of small businesses throughout the UK, Xero has been working closely with the government and its “Digital Strategy”. Part of that strategy involves the move to take tax returns online, and introduce quarterly reports rather than the traditional end of year dump.

The system will replace the current self-assessment tax return process undertaken by millions of business owners and the self-employed each year. The headline details include the requirement for all businesses, contractors and sole traders to manage taxes and accounts online by April 2018.

According to HMRC, the online portal will effectively serve like an online bank account – allowing people to register for new services, update information and understand what needs to be paid, without having to fill out a tax return again.

With upwards of 85 per cent of self-assessment tax returns being done online, the government and HRMC feel it is a natural extension to take it fully digital.

Xero is currently providing services to 100,000 businesses in the UK, companies which are already thinking digitally and wanting real-time access to sales figures, tax details and payroll numbers. Customers like these will be able to link business accounting software to a digital tax account, rather than running each separately.

“If you look at the way that small businesses tend to operate, over three million in the UK are 1-2 people – running on spreadsheets and bags of invoices and receipts,” Turner said.

“Moving to a platform like ours, it is the first time they have invested in a proper system – a real step up coming off manual systems.”

The increasing relevance of mobiles and tablets in the business world is reflected in Xero’s product offering. “If we all decided to quit our jobs and set up a business we would be unlikely to go to PC World and buy a PC each. We’d be on Google Apps, Office 365 and use social media rather than the old specification.”

Turner believes that the traditional office environment is decreasing in relevance, with it only being a matter of time before every business is running accounting in the cloud.

“If we accept businesses will migrate or start in a digital way, then the [digital tax accounts] transition becomes easier and smarter. Essentially, the government recognises it needs to change what it means with VAT and tax returns – it’s all about becoming smarter,” he explained.

Pinch points

Research carried out by Xero at the end of 2015 found that 65 per cent of British small business blamed financial issues, such as cash flow visibility and access to capital, as a reason for failure.

Xero and Turner see the new digital tax accounts agenda being pursued by the government as a major part in making micro and small businesses more aware of what the current financial situation is.

For those that fear the new digital tax accounts transition period is a disaster waiting to happen, Turner pointed to what has been achieved with Real Time Information (RTI) and PAYE. Having first been announced in 2002, RTI took ten years to finish but is now firmly imbedded in business practice.

Part of how the government and HMRC plan to come good on the ambitious five-year full roll out plan involves the range of open application program interfaces (APIs) set to be built. Businesses and software companies will then be able to use these APIs to help bring about efficiencies.

“We have many thousands of customers using the web API in Xero to do useful things. In that sense, the government web API initiative is great as that is how you do things today. The government is looking to businesses like Xero to help in the process, de-risking it, rather than HRMC having to do it all,” Turner explained.

“There is still a need to stay sober about this though, it’s a huge endeavour. With lots of people needing to transition from old records to digital tax accounts, it relies on HMRC getting it right. But what are the alternatives? We can’t wait, there is a need to do this at some point.”

Business owners still worried about how they can comply should have part of their apprehension lessened by the role companies like Xero believe must be played. Whereas previously Xero would be expected to only build software, its job now goes beyond that and into education.

“We have invested in training and online tutorials – it’s nothing about what we do but does educate our customers.”

At its annual Xerocon conference in February, Xero will be welcoming individuals including Charles Counsell, executive director of automatic enrolment at The Pensions Regulator, and Brigid McBride, API and third party software lead at HMRC. Discussions will then centre on how small and growing businesses can make sure compliance is met in the auto-enrolment and digital tax accounts arenas.

Going forward

The roadmap to full digital adoption is two-stepped. By early 2016, the more than five million small businesses that populate the UK, and first ten million individuals, will have access to a secure, personalised tax account. By 2020, more than 50m individuals and small businesses will have the same – removing the need to complete a tax return.

However, there have already been worries expressed about the digital tax accounts system. The Federation of Small Businesses has submitted to the Office of Tax Simplification, ahead of the March 2016 Budget announcement, so that there would not be a need for separate assessments for business rates, corporation tax, value added tax and national insurance contributions.

There is no doubt the process will be rocky, as most government digital initiatives tend to be, and partial to constant tinkering. However, what is reassuring is that big businesses such as Xero seem to be bought into the process. There is a logical commercial reason for this kind of company to be interested in the successful implementation of a digital tax accounts system, but Xero’s technology, expertise and presence in the market will be key.

Sign up to our newsletter to get the latest from Business Advice.


 
TAGS:

ABOUT THE EXPERT

Hunter Ruthven was previously editor of Business Advice. He was also the editor of Real Business, the UK's most-read website for entrepreneurs and business leaders at the helm of growing SMEs.

HR