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Building a better tax system for the UK

HMRC needs more resource to rebuild the UK's tax system

Author: ICAEW Tax Faculty

Published: 13 Jul 2021

ICAEW welcomes HMRC’s vision of a more flexible and responsive tax system outlined in the Tax Administration Framework Review but warns that significant challenges, such as creating a single identifier for taxpayers and consolidation of tax systems, can only be met if HMRC is properly resourced.

As the consultation on the Tax Administration Framework Review (TAFR) closes, ICAEW has identified three fundamental building blocks that will be needed to underpin the tax system in future and called on the government to ensure that HMRC has the resources it needs to deliver the change needed.

Ambitious plans need clear funding

ICAEW’s Tax Faculty has been considering and discussing the ambitious suggestions in TAFR with members since its publication on 23 March.

Consensus is that a more flexible and responsive tax system would be welcome, but the overwhelming view remains concern that HMRC should be resourced adequately if the most is to be made of this opportunity.

Iain Wright, ICAEW Managing Director, Reputation and Influence, said: “We are pleased that HMRC has sought views on how tax administration can be reformed so that it supports a modern digital UK tax system.

“We have identified three building blocks that need to be in place to facilitate future change: a single personal identifier to be used across all UK tax and benefits systems, better processes for registration, authentication and authorisation of tax agents and for all income tax, national insurance and capital gains tax liabilities to be established in one system. However, we think that the starting point should be significant simplification of the underlying tax rules, in advance of reforming administration.

“HMRC will need very significant additional resources and funding if it is to have the capacity to deliver the ambitions in its 10-year tax administration strategy. Good administration is essential to collect the taxes required to run the economy so the government must view investment in HMRC systems transformation as a long-term infrastructure investment.”

Fundamental building blocks

In ICAEW’s response, published as ICAEW REP 65/21, the Tax Faculty has identified three fundamental building blocks that must be in place to underpin tax administration and facilitate wider changes in the future:

1. A single identifier for individuals

The Office of Tax Simplification has suggested extending national insurance numbers (NINOs) to all that require them. ICAEW sees merit in this, given that the NINO is probably the most familiar identifier, although its link to the benefits system would need to be reviewed.

2. Registration, authentication and authorisation of agents

HMRC needs funding to develop a single system for registering, authenticating and authorising agents to provide a firm base on which HMRC can develop digital agent services and would also facilitate its work on agent standards.

3. Consolidation of systems.

Establish income tax and national insurance contributions, whether assessed and collected via PAYE or self assessment, and all capital gains tax (CGT) liabilities (for example including those for UK residential property) in a single system.

Simplification must be the first step

The existing tax administration framework implements many complex areas of tax law and practice that have evolved over many years. Simplification of the underlying tax rules is needed first so that the new administration system can be built for a simpler system.

Some work is already in progress to achieve this simplification, including the possible reform of basis periods and consideration of whether the 5 April tax year end is an obstacle to digitalisation. However, this simplification exercise must be undertaken, and implemented, before any changes can be made to the administration of tax. 

The faculty also warns that there is a danger that change on this scale over a very short period will detract from work already in progress. The time and costs involved to meet the requirements of Making Tax Digital, for example, should not be underestimated. This one initiative requires fundamental changes to accounts record keeping and processes for businesses as they switch to digital records.

Key considerations

In its response to the TAFR, the faculty has outlined a number of key areas of concern addressing the registration of taxpayers and agents, reporting and calculation of liabilities, payment and repayment of tax, and HMRC powers and safeguards.

Registration

  • Key to the tax administration framework is to identify with certainty all taxpayers who engage with the system. The UK currently makes use of several different identifiers for different purposes, and it would be helpful to review these and adopt a single unique taxpayer identifier if possible.
  • A single identifier should be designed to be suitable for data sharing across international borders.
  • A smoother and more timely registration process is needed for individual taxpayers with improved authentication and authorisation for the agents who represent them. 

Read more on ICAEW’s response to TAFR on the registration of taxpayers and agents.

Reporting and calculation

  • Greater digitalisation of the tax system presents efficiency opportunities, but also carries risks, such as third-party interception of sensitive data.
  • The single digital account/customer record is to give taxpayers a single and complete financial picture and bring together different taxes and data sources. However, it can only do so if the administration and collection of national insurance and CGT are considered at the same time. The current rules for 30-day reporting of CGT are not good enough.
  • It must be easy for taxpayers to challenge incorrect information supplied by third parties to HMRC. Taxpayers should not be held liable where that information is wrong.

Read more on ICAEW’s response to TAFR on the reporting and calculation of tax liabilities.

Payment and repayment

  • The PAYE Real Time Information system continues to struggle with the problems identified in its post-implementation review in 2016. PAYE codes are being overloaded with adjustments, which makes them difficult for taxpayers to understand, and often contain errors.
  • HMRC’s PAYE records must be accurate. Many employers are unable to reconcile their liabilities and payments figures with HMRC’s records and differences between HMRC and DWP figures have caused problems for universal credit claimants in particular. Departments should work together to share data so that taxpayers receive a complete service in relation to their tax and finances.
  • Taxpayer statements are very difficult to follow, particularly where payments on account are made, amounts are being collected through tax codes and where interest is being applied. Better, more regular statements and reminders within digital tax accounts, would help to provide more clarity.
  • Taxpayers should have the right and be given the access to offset and allocate payments to specific tax liabilities.
  • There must no move towards earlier payment of tax based on in-year estimates until HMRC can demonstrate that these can be made accurate enough to form a basis for payment.

Read more on ICAEW’s response to TAFR on the payment and repayment of taxes.

Powers and safeguards

  • ICAEW Tax Faculty members would like to see more collaborative working  between HMRC and taxpayers/their agents, particularly in relation to enquiries.
  • This could be helped by HMRC sharing tax-related information it holds on taxpayers and being open and transparent about the concerns it has about returns filed by them.
  • Any further investigative powers granted to HMRC must be matched by additional taxpayer rights and safeguards and HMRC should make clear what those rights and safeguards are when corresponding with taxpayers. 

Read more on ICAEW’s response to TAFR on HMRC’s powers and taxpayer safeguards.

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