What is real-time tax?
Definition of real-time tax
Real-time tax refers to the continuous visibility of your tax liabilities as and when they change (rather than a snapshot of what your liabilities are at a particular time, for example, once a year after submitting a self assessment tax return).
Real-time tax returns and Making Tax Digital
As part of the government’s Making Tax Digital (MTD) initiative, HMRC has said that it will “collect and process information affecting tax in as close to real-time as possible, to help prevent errors and stop tax building up”. This is a big move away from the current annual tax return which involves preparing and submitting financial information once a year and receiving a tax bill based on this.
Download your free guide to find out how Making Tax Digital will affect you!
HMRC claims the new system of real-time tax reporting will improve the quality of record keeping and reduce the £6.5bn that is currently lost through errors. It also hopes that fewer businesses will face the shock of a bigger than expected tax bill and will be able to plan for making payments.
How will real-time tax work in practice?
If MTD applies to you, you will need to use some form of digital tax software to record your financial information. Through this software you will be required to submit figures to HMRC throughout the year – at least quarterly. HMRC has been keen to stress that this does not mean that businesses will have to file four tax returns per year. Your tax liabilities will be calculated as and when your information is submitted and will be visible in your digital tax account.
Although the above process is not literally happening in ‘real-time’, it will give you a much clearer idea of how much tax you owe throughout the year and hopefully help you to avoid any nasty surprises at the end of the year.
Real Time Information (RTI)
It’s worth noting that HMRC has implemented real-time reporting before with RTI. RTI was introduced in 2013 for employers to send information about wages, salaries, PAYE and National Insurance to HMRC every time they pay staff, as opposed to the old method of submitting an annual P35.
Real-time tax in FreeAgent
FreeAgent is an example of how accounting software can perform real-time calculations from the financial information you enter throughout the year, to work out how much tax you need to pay. In FreeAgent this is displayed in the Tax Timeline, which includes the dates that each bill is due, helping you to plan ahead and avoid any surprise bills.
Find out more about how FreeAgent's accounting software can help you manage your small business finances
Got questions? Ask Emily!
FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.
