As the new year begins, it seems a good time to look ahead to how the tax system might develop in the future. In this article, I will consider HMRC’s 10-year strategy published in July 2020 under the title ‘Building a trusted, modern tax administration system’.
HMRC’s ambitious, though aspirational, document focuses on extending the use of digital processes, including the Making Tax Digital (MTD) programme, to bring about administrative efficiencies (whether for taxpayers or for HMRC is unspecified) and gains in productivity for businesses, and to make tax ‘straightforward and hard to get wrong’ for the majority of them. It also visualises:
- better use of real-time data
- a single digital account and personalised services for all taxpayers
- assuring and, where necessary, raising the standards of agents and intermediaries who interact with taxpayers, and
- ‘effortless’ calculation and payment of tax for the vast majority of taxpayers.
The vision outlined in this document is said to be achievable in the next 10 years and to comprise three elements:
- for policy, a progressive extension of HMRC’s MTD work
- for systems, exploring appropriate timing and frequency for the payment of different taxes, and the technology infrastructure needed to support that, and
- for law and practice, a reform of the tax administration framework itself.
Much emphasis is placed upon the potential for digital processes to reduce the £31 billion tax gap because the capacity of HMRC for real-time risk assessment will enable it to intervene early to prevent revenue loss, making it harder for those who are so inclined to engage in ‘rule bending and breaking’. That might work, just so long as HMRC is sufficiently resourced to make such interventions early enough.
Extension of MTD
The document proposes that:
- from April 2022, all VAT payers with turnover below the £85,000 threshold will be obliged to keep digital records and report quarterly to HMRC
- businesses within the charge to income tax will have similar obligations from April 2023 if their annual profits are over £10,000, and
- as set out in the MTD for corporation tax consultation document, MTD for corporation tax will follow from April 2026. For most corporation tax payers that already use iXBRL tagging, that will probably be a fairly easy adjustment, less so perhaps for smaller corporate entities such as local charities and CASCs (whose precise obligations are to be part of the ongoing consultations).
Agents and advisers will be pleased to note that HMRC intends to ensure that they will be able to see what their clients see, indicating that (if this proceeds as planned) the long delays in giving agent access that characterised the early days of MTD are unlikely to be repeated.
Use of real-time data
The document begins with the declaration that ‘at the core of an effective and modern tax system is real-time information’. Probably the biggest challenge in delivering this vision will be how best to fulfil the objective to ‘reduce the need for taxpayers and agents to submit additional information that HMRC either already holds or could verify itself’, while providing effective means of correcting inaccurate data (whether from taxpayers themselves or from third parties), protecting taxpayers’ rights to confidentiality and observing data protection requirements.
This is likely to throw up conflicts of interest which the document rather skates over. They are, however, topics with which the Office of Tax Simplification has started to engage and to which HMRC must find answers before its trusted, modern administration system can get off the ground.
Another danger is that if inaccurate third-party data is populated into digital accounts and returns, the taxpayer may rely on it to the exclusion of the correct data which they hold, simply because the inaccurate data appears in an official source. Alternatively, if the taxpayer does challenge the (inaccurate) official figure, how willing is HMRC to believe the taxpayer rather than the bank, or employer, or other third-party source, which supplies that data? If a taxpayer challenges wrong information about their earnings supplied by an employer, HMRC’s response may be to tell the taxpayer to take the matter up with the employer, which may be difficult if the employer in question is no longer in existence, or the taxpayer has lost touch with them.
On the other hand, an advantage of real-time data cited in the document is that it will enable HMRC to respond more quickly in times of emergency. For example, if HMRC had access to results from self-employed taxpayers that were no more than four months old, many more of the newly self-employed would have been able to benefit from the Self-employed Income Support Scheme during the coronavirus pandemic. As it was, the best HMRC could do with the current system was to award grants to those who had filed returns for 2018/19.
In addition, smart use of available data should enable HMRC to fulfil another of its long-held ambitions: to simplify the process of registering for the various different taxes by making it possible to register once, for all taxes.
The need for reform of self assessment
The present self assessment regime was introduced a quarter of a century ago, and will quite simply need replacing if the post-digital availability of real-time information is to be allowed to facilitate real-time assessment and payment.
The document makes clear that MTD does not of itself entail greater frequency of payment. However, HMRC is mindful of the possibilities here. The current time-lags in self assessment can lead to build-up of debt, especially for the newly self-employed. The OTS report ‘Tax reporting and payments review’ showed that a facility to pay more regularly would not be unwelcome in some quarters as a means of helping people to budget and avoid surprise tax bills.
Also, if payment by instalments should become more widespread for tax, why not align this with monthly payments of universal credit which many low-income self-employed people might be claiming in the years to come, to ease cash-flow? That, of course, would require HMRC and the DWP to work together; not something that comes naturally to either department, but surely worth doing in order to offer a better service to their mutual customers.
Finally, we must spare a thought for the diminishing, though still substantial, segment of the population that will not be able to keep up with all these developments in the digital sphere. It is reassuring that HMRC will extend the same exemptions from digital record-keeping and reporting to those for whom it is not reasonably practicable to do so, owing to age, disability, remoteness of location, or any other reason (the categories of digitally excluded identified by LH Bishop Electrical Co Ltd and Others v HMRC Commissioners  UKFTT 522 (TC)).
On the other hand, it is worrying that the complete elimination of paper-based communication is also envisaged, as it will equate to a 3% reduction in HMRC’s carbon footprint. It is hard to see how the digitally excluded will be able to comply when all sources of official information are beyond their reach.
Many more consultations are promised while this 10-year strategy is being implemented. That is good; to work properly, the process will need not only constructive participation by the profession, but also HMRC to be open-minded about what it is being advised and well enough resourced to be able to carry out what is recommended.