Compliance

Preparing for Tax Update 2026: Compliance Checklist for Small Businesses

With sweeping reforms coming under the Tax Update 2026, small businesses must get ahead of changes to VAT options, ISA reforms, Self Assessment payment schedules, and more. Use this checklist to stay compliant and avoid penalties.

By NomadicTax Research Team • 5-8 min read • June 30, 2026

## Key Changes Affecting Small Businesses Tax Update 2026 (published 23 June) introduces several upcoming changes that will affect how small businesses manage tax compliance. Among them: - **Option to tax** VAT notification process will be digitised by end of 2026. - Proposals to modernise the distributions framework (shareholder payments vs dividends). - Income Tax Self Assessment (ITSA) more frequent, and for some PAYE-income individuals more payments in-year (from April 2029). - Review of Benchmark Scale Rates (BSR) & Overseas Scale Rates (OSR) for travel/accommodation expenses. - Simplification of Inheritance Tax reporting for certain non-taxpaying trusts from 6 April 2027. ([gov.uk](https://www.gov.uk/government/publications/summary-of-tax-update-2026-simplification-modernisation-and-fairness/tax-update-2026-simplification-modernisation-and-fairness-summary?utm_source=openai)) ## Compliance Checklist 1. **Digitise VAT option to tax process** - Evaluate your current process (paper vs digital). - Ensure your accounting software is ready to receive or send digital notifications and revocations. - Train staff or advisors to use the new digital workflows. 2. **Review employee travel and overseas rates** - Gather data on current Benchmark Scale Rates & Overseas Scale Rates claims. - Estimate whether changes may lead to higher or lower allowances. - Adjust payroll or expense policies to ensure compliance without over-claiming or under‐paying. 3. **Self Assessment timing & cash-flow planning** - If you or your clients rely on Payments on Account, begin modelling expected liabilities under more frequent/in-year payment regimes. - Cash flow forecasting for 2028-29 to capture any increase in PAYE payments or changes in instalment frequency. 4. **ISA and Distribution reforms** - For clients using Lifetime ISAs or S&S/Innovative Finance ISAs, assess implications of the new first-time buyer ISA product (replacing Lifetime ISA) and anticircumvention rules (22% charge on interest, restrictions on transfers). - Monitor draft legislation of the distributions framework to understand when a payment qualifies as a distribution vs non-corporate shareholder payment. 5. **Trustees & Inheritance Tax reporting** - If managing non-taxpaying trusts, check whether trust transfers/events currently require IHT reporting where no tax is due; from **6 April 2027** some will be simplified. - Prepare to adapt accounting/reporting systems accordingly. ## Practical Example: Walk-through Consider a small cleaning business with two director/shareholders. They receive dividend payments and reimburse travel expenses for staff who occasionally work overseas. Under the proposed changes: - Dividend treatment changes may affect how much is taxed vs seen as distributions. - Overseas staff travel allowances claimed under OSR may need new documentation or lower rates. - If the business currently uses a paper Option to Tax notification, that process must be replaced with digital submission. By mapping these items now, the business can avoid being caught off guard when rules change. ## Actionable Timeline | Date | Action | |-------|--------| | Now – mid-2026 | Audit current expense & distribution practices; upgrade software; engage advisors. | | Late 2026 | Begin implementing digital-only VAT option to tax; review Self Assessment cash flows. | | Early 2027 (from 6 April) | Apply new rules for IHT trust reporting; distributions changes as legislation passes. | | From 1 January 2027 | Foreign PE exemption mandatory—ensure accounting matches regime. | ## Why This Matters Failing to adapt may result in disallowed expense claims, higher corporation tax, surprise liabilities, or penalties. But planning early also offers opportunity: trimming inefficiencies, making systems leaner and more predictable, and gaining a competitive edge with better cost forecasting and trust with HMRC.