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:<br>
- Option to tax VAT notification process will be digitised by end of 2026.<br>
- Proposals to modernise the distributions framework (shareholder payments vs dividends).<br>
- Income Tax Self Assessment (ITSA) more frequent, and for some PAYE-income individuals more payments in-year (from April 2029).<br>
- Review of Benchmark Scale Rates (BSR) & Overseas Scale Rates (OSR) for travel/accommodation expenses.<br>
- Simplification of Inheritance Tax reporting for certain non-taxpaying trusts from 6 April 2027. (gov.uk)
Compliance Checklist
-
Digitise VAT option to tax process<br>
- Evaluate your current process (paper vs digital).<br>
- Ensure your accounting software is ready to receive or send digital notifications and revocations.<br>
- Train staff or advisors to use the new digital workflows.<br>
-
Review employee travel and overseas rates<br>
- Gather data on current Benchmark Scale Rates & Overseas Scale Rates claims.<br>
- Estimate whether changes may lead to higher or lower allowances.<br>
- Adjust payroll or expense policies to ensure compliance without over-claiming or under‐paying.<br>
-
Self Assessment timing & cash-flow planning<br>
- If you or your clients rely on Payments on Account, begin modelling expected liabilities under more frequent/in-year payment regimes.<br>
- Cash flow forecasting for 2028-29 to capture any increase in PAYE payments or changes in instalment frequency.<br>
-
ISA and Distribution reforms<br>
- 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).<br>
- Monitor draft legislation of the distributions framework to understand when a payment qualifies as a distribution vs non-corporate shareholder payment.
-
Trustees & Inheritance Tax reporting<br>
- 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. <br>
- 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:<br>
- Dividend treatment changes may affect how much is taxed vs seen as distributions.<br>
- Overseas staff travel allowances claimed under OSR may need new documentation or lower rates.<br>
- If the business currently uses a paper Option to Tax notification, that process must be replaced with digital submission.<br> 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.