Making Tax Digital: Interfacing with HMRC in real time - all the time
In the fourth of a series of articles on the making tax digital consultations, Philip McNeill, ICAS Head of Taxation (Tax Practice and Small Business Taxes), outlines some of the implications of the consultation on Transforming the tax system through better use of information.
The consultation on Transforming the tax system through better use of information is unique among the six Making Tax Digital consultations in that it is focussed almost exclusively on HMRC and how it can make taxpayers’ lives easier through using information it already holds.
But don’t be misled by the title: this heralds fundamental change in how taxpayers, agents and HMRC interact. It ushers in a real-time system with more frequent contact, more review, less data origination, and with far reaching implications for workloads, costs and timetables.
No more duplication
HMRC receives information from employers, financial institutions and other government departments about employment income, interest on savings, pensions and benefits. Currently, many self-assessment taxpayers need to resupply this information to HMRC, in some cases, with few additional details.
With slicker use of data, HMRC aims to put the information it already holds into individual taxpayer’s digital tax accounts, so all the taxpayer (or their agent) need do is double check and fill in the gaps. The role of agent (and taxpayer) is set to change from preparer to reviewer.
A quick review of tribunal cases for careless error, will show penalty charges for innocent errors in reporting information which HMRC already held. For example, the Tribunal recently confirmed a £1,141.87 careless error on the footballer, Nicholas Blackman, when one of his three employments was missed from his self-assessment return (Nicholas Blackman  UKFTT 0465 (TC) TC05218).
The prime reason HMRC suspected a mistake was that it already held employment information from all three of Mr Blackman’s employers!
HMRC is also looking at month by month PAYE reconciliations – aiming to avoid, or reduce, year-end PAYE under and overpayments. The current system of PAYE tax codes was not designed for the modern labour market with multiple employments, fluctuating earnings, and potentially a mix of different income sources, from employment, pensions, property and some freelance earnings.
Real-time adjustment of PAYE tax codes is due to start from April 2017. Explanations of why tax code changes are being made will be given via the taxpayer’s digital tax account.
For employers, and more particularly, payroll providers, the other side of the equation is much higher frequency of tax code changes and while the employee in HMRC’s examples, uses HMRC webchat, webinars and a digital tax account to understand the changes, it is not impossible that many employees will simply contact HR or the payroll provider.
The first question in the consultation is about the frequency of such employer notifications.
Not just for employees
The bulk of the consultation focuses on five ‘case studies’ – a pensioner and four employees: none of whom have a tax agent but the implications of HMRC’s use of information reaches beyond the P800 employee into the agent-zone of directors and self-assessment employees, with potentially very complex tax affairs.
HMRC envisages postal and text alerts to taxpayers in real-time. When HMRC becomes aware of changes that affect a taxpayer’s liability, through employer or bank information feeds, the taxpayer will receive an alert to check, or create, a digital tax account in order to find out what is going on.
The Personal Savings Allowance is expected to mean that 95% of savers have no income tax liability on savings income. However, for the 5% who still have tax to pay, with the end of tax deduction at source on most forms of interest, there could be an unexpectedly large tax bill.
So HMRC is aiming to use bank data on savings to amend tax codes for individuals with taxable savings – starting from October 2016. This is not going to be universal and, as HMRC will be using the previous year’s income figures, it may not be entirely accurate.
Looking to April 2018, HMRC wants to be updating PAYE codes for interest more frequently.
Rental and self-employed income below £10,000
From 2018, taxpayers who are not required to keep digital records and make quarterly submissions to HMRC will be able to ‘opt out’ of self-assessment by using a personal digital tax account to interact with HMRC. Taxpayers would need to check that their digital tax account record was accurate and complete at least annually.
End of the tax return
For employees with rental or self-employed income of £10,000 or more, there will be prompts each quarter to upload the additional details from their digital records.
Tax which is not collected under PAYE (for example because it would exceed the maximum deduction allowed), may be paid as you go by direct debit, or at the year end. The in-year liability will be estimated within the digital tax account. The year-end procedure will involve confirming that the information in the digital tax account is complete and correct: this will replace the annual self-assessment tax return.
Data - accuracy and security
With all this information flow of personal data, there will be ‘robust matching to the correct customer’. Taxpayers will be allowed to ‘query’ information held by HMRC: the default is that third party supplied information is correct.
Privacy issues come to the fore with jointly held assets; with HMRC assuming a 50:50 split. Banks and other third parties, will be supplying more detailed information to HMRC and more frequently. Data security and data protection will be paramount.
Correcting information – third party assessment or self-assessment?
Where a taxpayer thinks that information held by HMRC is incorrect, the default will be for the taxpayer to contact the third party provider and arrange for the third party to correct the error. This is a far cry from the principle of self-assessment.
The recent case of Robert King ( UKFTT 409 (TC) TC05163) reported this June, suggests a very different interpretation – that an individual’s self-assessment is just that. Individual partners were allowed to use their own calculation for their share of partnership income on their personal tax return, even when this differed from that shown on the partnership return.
Getting involved – influencing the outcome
The impact of all these changes is likely to vary greatly between different businesses and accounting practices. Your view is vitally important.
HMRC is running webinars specifically for agents, the next one is on Tuesday 25 October 2016. You can register for these, as well as for face to face and other events online.
To be part of the ICAS response, please let us have your comments at firstname.lastname@example.org and complete our short poll below.