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"Digital exclusion is a real possibility if the Government presses ahead with its proposed mandatory digital tax compliance [requirements] for UK businesses," the Institute of Chartered Accountants in England and Wales (ICAEW) has said, warning the government that small businesses are likely to be hit hardest.
ICAEW has newly published a report on the experience of other countries that have attempted to modernize their tax compliance systems, to feed into an ongoing consultation on proposals for modernization in the UK.
ICAEW Technical Manager David Lyford-Smith said: "We have seen from other economies that forcing implementation in a short period of time can cause problems. The results of an ICAEW survey of businesses earlier this year showed that only 25 percent of UK businesses maintain electronic accounting records, so there is a huge amount to be done by businesses, HM Revenue and Customs (HMRC), and the software industry in a very little time."
The UK Government has presented plans to make HMRC the most digitally advanced tax administration in the world by 2020. Under its Making Tax Digital initiative, most businesses, self-employed people, and landlords will be required to "keep track of their tax affairs digitally and update HMRC at least quarterly via their digital tax account."
However Lyford-Smith said: "The largest and most persistent issue in introducing the digitalization of tax is that of digital exclusion, which is common among small businesses. While Government can work to educate and provide resources for many affected by digital exclusion, total compliance is impossible. There must be an avenue for those who cannot comply with digital reporting to avoid penalties. This may be through the maintenance of traditional paper-based record keeping and filing or via supporting a network of accessible and affordable tax agents that can keep records and file on behalf of their clients."
"We should look at examples of other countries where the digitalization of tax has been introduced to see the universal impact. Although Russia has rolled out a program of digitalized tax services quickly through robust regional pilot testing, the rapid pace of change has led to some inefficiencies. Estonia's program of digital transformation is seen as one of the leading examples in the world and yet digital exclusion is still a common problem among older citizens and in remote areas where internet connectivity is poor."
He concluded: "We believe the move to digital should not be made compulsory and instead should be a matter of choice for business owners based on a compelling business case for change."
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