In its latest report the Office of Tax Simplification concludes that tax reporting might be made easier for taxpayers if third parties were required to provide information to HMRC. The Tax Faculty considers the report and what steps would be needed to make this use of third-party data a reality?
Following its earlier work on third-party reporting and its recent call for evidence, the Office of Tax Simplification (OTS) conducted a short survey of taxpayers in which 64% of respondents considered the main benefit of third-party reporting would be less administrative work for them.
Indeed, taxpayers who file a self assessment tax return will be familiar with the annual stress as they search for the paperwork to support the entries on the return, including:
- interest certificates from banks;
- dividend statements from brokers;
- rental income from letting agents;
- pension contributions paid;
- gift aid statements from charities and from online donations; and
- employer information, such as P60, P45, P11D.
In its latest report, Making better use of third party data a vision for the future, the OTS has recommended that this type of data should be reported to HMRC by third parties and used to pre-populate the taxpayer’s single tax account. Some of this is provided already, but most isn’t and what is there can be inaccurate.
For many taxpayers, this process could help to replace the self assessment personal tax return, and for employees could extend the ability to collect further tax on income through an adjusted PAYE code.
In Budget 2021, the government committed £68m to developing the single customer account (SCA) and single customer record (SCR). The SCA will replace the existing personal tax account and business tax account, so drawing all a taxpayer’s information together into one place. The SCR is at the HMRC end.
The OTS recommendations suggest that third-party data reporting has the potential to remove particular taxpayer populations from the self assessment system altogether.
This has direct relevance to the Making Tax Digital for income tax self assessment (MTD ITSA) project too. As more data is pre-populated into the new SCA, it would already be in the system ready to be checked as part of the taxpayer’s end-of-year submission (also known as the crystallisation) and would inform the tax calculation.
The pre-populated information could also be used to update PAYE tax codes. ICAEW’s Tax Faculty has previously expressed concern to HMRC that PAYE codes are not well understood by taxpayers and there is danger in overloading them with too much detail.
All of this pre-supposes that the information supplied is accurate and taxpayers and their agents would still want to check this.
None of this is easy and the OTS doesn’t shy away from the difficulties of responsibility, can taxpayers rely on this data, do they have to check it, and who is responsible if the information is wrong?
Regarding the most effective choice of unique identifier so that data be readily and accurately matched with HMRC’s taxpayer records, the National Insurance number has been suggested by the OTS as the most suitable. It recognises that not all UK taxpayers currently have one and its use would need to be extended which mean involving other government departments.
Data security is vital and the report notes it is “…important for work to continue to find innovative ways to link data sources into the financial and tax system in a secure manner.”
HMRC should also explore the most effective ways to increase taxpayer trust and provide appropriate safeguards:
- ensuring the data held is presented to taxpayers and agents in a transparent and detailed way;
- allowing taxpayers to approve or validate data matched to their accounts; and
- ensuring there is an appropriate mechanism for taxpayers to query or amend data.
Finally, repeating a common refrain by those suggesting change, the report also recommends the government set out a clear roadmap for how these changes would be consulted on and then implemented with adequate resource. None of this will be possible unless HMRC has the necessary funding.
This guidance is created by the Tax Faculty, recognised internationally as a leading authority and source of expertise on taxation. The Faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.