Earlier tax payments may be coming in the next parliament

As part of the government’s "Tax day” announcements on 23 March, HMRC has launched a call for evidence on the impact of requiring payment of income and corporation tax more quickly.

In 1944, the cost of war drove the government to introduce the pay as you earn (PAYE) system. Since then, tax has been deducted from employees as they are paid each week or month and this system has proven itself as a more efficient way to collect tax compared to previous methods which only collected tax once or twice each year.

Perhaps the cost of the global coronavirus pandemic will make earlier collection of other taxes from other taxpayers the next step change?

The call for evidence on timely payment is published alongside a call for evidence on the tax administration framework, which includes wider questions on payment; both follow from the publication of HMRC’s 10-year strategy Building a trusted, modern tax administration system in July 2020.

The problem to be solved

HMRC would like taxpayers to pay their tax closer to the time their income is received. Statistics show the rate of unpaid income tax due through self assessment (ITSA) and corporation tax (CT) (except for that paid through the quarterly instalment payment regime) is much higher than for taxes such as VAT and income tax and national insurance contributions collected by PAYE. The main focus of this call for evidence is therefore ITSA and CT.

Earlier payment will suit some taxpayers

An Office of Tax Simplification report in 2019 highlighted that many of the self-employed – particularly those on low incomes – would welcome paying tax more frequently to help with budgeting. This may also apply to those providing services only (personally with no employees) and those working in the gig economy or through an online platform.

The time lag in the current system is felt most acutely by the newly self-employed who are often taken by surprise on receiving their first tax bill, especially where it includes a payment on account for the next tax year.

HMRC's call for evidence acknowledges this but then rather ducks the issue since the newly self-employed will not be required to comply with Making Tax Digital for income tax self assessment (MTD ITSA) until year three, and so may not be affected by earlier payment in their opening years.

Where their circumstances allow, well-advised taxpayers generally set money aside to cover their tax bill, often in a separate account. They are likely to prefer to continue doing so as the funds remain available to cover temporary cash flow problems.

HMRC has long been focussed on this problem and consulted on a voluntary scheme in 2016.

The main thrust of the responses of ICAEW members to the 2016 consultation was that:

• Other solutions, such as changing the payments on account regime, should be considered if necessary.
• Budget payment plans are available and could be better promoted. HMRC was given funding at Spring Budget 2021 to do this work.
• ITSA and CT are annual taxes, and, for many taxpayers, the amount of the liability can only be accurately assessed on an annual basis. It is unhelpful for government and HMRC to try to equate tax bills and electricity bills. It sometimes seems that HMRC regards GAAP and accruals accounting as a nuisance.

Members will note that the latest call for evidence does not include any commitment to earlier payment being voluntary.

The link with MTD

The government has always denied that the quarterly update element of MTD ITSA and CT is being introduced with a view to earlier payment. Many in the profession and other interested parties have voiced doubts about this.

The call for evidence mentions that those not within MTD ITSA may have to provide information to HMRC more frequently or accept that payments would be made on whatever estimates are in HMRC’s system – this seems to extend MTD ITSA obligations to more taxpayers by default.

ICAEW's reaction

ICAEW’s position has always been that MTD should not be mandatory and has recently focused particularly on the quarterly update obligations, arguing that the estimated liability information will not be sufficiently accurate to provide a reliable forecast, let alone as a basis for payment. The benefits of MTD stem from improved, digital, record keeping.   

Caroline Miskin of ICAEW’s Tax Faculty says: “ICAEW welcomes the fact that the government is engaging at an early stage before policy decisions have been made. Earlier payment is in the government’s sights but is not an inevitable consequence of MTD ITSA and CT.

“It is disappointing that underlying simplification of the tax rules, to make it easier for taxpayers to understand their liability, is not being considered before digitalisation and earlier payment.”

The faculty questions whether HMRC will have the capacity and funding to implement such wholesale changes properly.

Miskin concludes: “HMRC is currently failing to provide an adequate level of customer service and increasing the number of touchpoints between taxpayers, agents and HMRC is only likely to add further pressure, even if more contact moves online.”   

The call for evidence runs to 13 July 2021. The faculty will arrange a webinar to gather the views of all ICAEW members. In the meantime, please send comments to caroline.miskin@icaew.com

More analysis of Tax Day announcements:

• Tax Day announcements take a long-term view
• Tax Administration Framework Review is ‘mammoth’ undertaking by HMRC
• HMRC consults on mandating PII for tax advisers
• More detail on notification of uncertain tax treatment
• Transfer pricing documentation requirements to be made more robust
• Did Tax Day deliver on sustainability?