Paying tax sooner – what are the challenges and advantages?
Paying tax sooner – what are the challenges and advantages of paying tax closer to real-time? HMRC calls for evidence and ICAS responds.
Nobody is likely to volunteer to pay tax sooner, unless it would earn interest at a competitive rate perhaps. But knowing what your tax liability is, and when you need to pay it, as close to the time of the taxable transaction as possible is a worthwhile goal.
This subject is the focus of a recent call for evidence from HMRC entitled Timely payment. And ICAS has submitted its response.
A call for evidence
The HMRC Timely payment call for evidence has a special focus on trading and property income for income tax and corporation tax, but the remit is wide enough to encompass PAYE taxpayers within Income Tax Self Assessment (ITSA), taxation of capital gains and even the Soft Drinks Industry Levy and Insurance Premium Tax.
Rather than being a list of recommendations, the call for evidence is just that. There are 45 questions aiming to find out what happens now, and what challenges and advantages might come with change. What are the key issues?
How much do I owe?
The first big question is working out the tax bill. If you buy something in a shop with Electronic Point of Sale (EPOS) then, barring data errors, the amount of VAT can be calculated before you have paid.
But where there are complex calculations needed, for example with capital gains, or the tax is based on ingoings and outgoings over a period of time, such as for income tax and corporation tax on trading profits, then it just isn’t possible to know the exact tax liability immediately.
So there is choice: either the system needs to be simpler, for example tax at a fixed rate, or with flat rate deductions, or tax liabilities need to be estimated.
Moving to digital taxation
The government has a ten-year plan - Building a trusted, modern tax administration system. And timely payment fits within this. But there are significant hurdles. The present tax system was built for an earlier age. Different offices dealt with different income streams and time was allowed to make paper returns.
This leisurely approach means that it is not uncommon for delays of two years or more between the time of a taxable transaction and the final tax bill for those in income tax self-assessment. But quarterly filing for trading and property income is on its way.
Faster reporting and earlier payment fit naturally with quarterly reporting, but how do we get there? For example, if businesses were suddenly faced with catching up a couple of years’ tax payments, what would it do to their cashflow?
And what are businesses doing now with the money? Interestingly, an ICAS survey showed that most businesses were not saving up for their tax bills, but rather aim to pay them out of current resources. The pandemic has highlighted some of the difficulties in that approach; with falling profits in many sectors, and current tax bills based on historic, higher profits.
A series of questions
For ITSA and corporation tax there are a number of key issues on which the call for evidence invites comments. As businesses move towards quarterly reporting for ITSA (April 2023) and corporation tax (pilot from April 2024):
- Should quarterly returns and payments be linked?
- How accurate would tax payments based on quarterly payment be?
- How will businesses manage their cashflow in a transitional period as payment of tax is brought into real-time?
- Should there be a separate framework for calculating tax for micro entities? E.g. a system of flat rate expenses.
- Is special provision needed for specific industries?
- Are there examples from overseas jurisdictions which work well and could be followed by the UK?
The ICAS view
The ICAS view, based on feedback from a focus group, webinar polling questions and committee members is:
- quarterly payments should not be based on submitted returns
- a system of estimates along the lines of current payments on account or a modified version of large company QIPs could be an effective alternative
- businesses will need time and help to manage cashflow in the transition to real-time payment. A period of around five years, potentially with government-backed loans on offer, may be needed to fund the transition
- a special micro entities regime would be appropriate, though this should allow businesses to continue with the full tax rules if they prefer
- lessons should be learnt from the approach used for 30-day CGT reporting. Numerous difficulties have arisen with roll-out of this model. Future systems should be designed to avoid a repetition of the problems experienced here
- radical reform of the tax rules should be considered, including consideration of a change to the tax year end, and alignment of tax basis periods across different income streams across income tax.
The full submission is on the ICAS website - Timely Payment Call for Evidence: Response from ICAS.
We want to hear from you
While the ICAS submission has gone in, there will be ongoing discussions with HMRC so please let us have your views on any of the issues raised by emailing tax@icas.com.