HMRC has revealed plans this morning for a ‘digital tax system’ that will mean the annual tax return as we know it will be abolished by 2020.

The body claims that paying tax will become less burdensome for British businesses under the proposals set out in a consultation today.

It announced that 1.3 million small businesses would be able to benefit without needing to update HMRC quarterly or keep their records digitally.

Other advantages of the new system, HMRC said, would be:

• Cash-basis accounting so thousands more will be able to pay tax based simply on the difference between money they have taken in and what they have paid out, meaning tradesmen will pay tax on cash received rather than invoices issued

• Prompts and alerts to help businesses get tax right and giving advice on tax reliefs they might be missing out on

• Greater certainty over tax bills so businesses don’t have to wait until the end of the year to find out how much they have to pay.

The government is also considering deferring digital record keeping and quarterly updating for a further group of small businesses.

Those who cannot go digital will not be required to, officials stated.

Edward Troup, executive chair, HMRC, said: “Making Tax Digital represents very significant change. It will bring the tax system into the 21st century and help make HMRC one of the most digitally advanced tax administrations in the world. Going digital will abolish the annual tax return as we know it by 2020, replacing it with a personalised digital service through which taxpayers will be able to send and receive information to HMRC at the click of a button.

Mike Cherry, Federation of Small Businesses national chairman, said: “Removing small firms and the self-employed with modest turnovers altogether from the proposals will now mean that in addition to the 1.6 million small businesses and landlords that were already excluded, as a result of these changes announced, a further 1.3 million small firms and landlords will no longer be in scope. This means that half of the UK’s 5.4 million small businesses will not be affected by quarterly tax reporting.”

Jane Ellison MP, The Financial Secretary to the Treasury, said: “This new system will make the UK’s tax administration more efficient and straightforward, and will offer businesses greater clarity when it comes to paying their tax bills.

“By replacing the annual tax return with simple, digital updates, businesses will be able to concentrate on putting people and profit, not paperwork, first.”