HM Revenue and Customs has published plans for how it wants to achieve “the end of the tax return” by 2020.
By the end of the decade most businesses, self-employed people and landlords will be required to use software or apps to keep their business records and to provide regular updates of information.
HMRC said taxpayers will get an up-to-date picture of their tax affairs, providing them with greater certainty.
Most businesses will also be required to update HMRC quarterly, or more frequently if they wish.
HMRC said it did not take these decisions lightly and acknowledge there would be a transitional period but said this change “goes with the grain” of how those running small businesses are using technology day-to-day.
Jane Ellison, Financial Secretary to the Treasury, said: “We are committed to a transparent and accessible tax system fit for the digital age, and Making Tax Digital is at the heart of these plans.
“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.”
Ms Ellison said the small minority who genuinely cannot use digital tools will not have to do so, and the reforms will not apply to unincorporated businesses and landlords with an annual income of below £10,000.
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 1.6m small businesses and landlords that were already excluded, as a result of these changes announced, a further 1.3m small firms and landlords will no longer be in scope.
“This means that half of the UK’s 5.4m small businesses will not be affected by quarterly tax reporting.
“The expansion of cash accounting, a longer lead-in time for implementation and the offer of direct financial assistance will also help.”