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Will tax digitalisation drive universal filing?

Author: ICAEW Insights

Published: 28 Jul 2021

Huge changes to working practices over the past few years have reignited the debate on whether a universal filing process would help to better engage individuals with the tax system and help them to take more ownership of their affairs.

As individuals increasingly flit between employment and self-employment, tax experts are pondering the potential benefits of consolidating the existing self assessment and PAYE systems - and instead requiring everyone to fill out a tax return for their personal tax as a viable way forward.

The suggestion has been mooted by the government as part of its 10-year tax administration strategy, Building a trusted, modern tax administration system, and following a call for views on how the legislation underpinning HMRC’s administration of the tax system could be updated.

Caroline Miskin, Technical Manager in ICAEW’s Tax Faculty, said encouraging individuals to better engage with the tax system and avoid the filing cliff edges that typically occur when their circumstances change could be a good thing.

“Under current rules, there is a real muddle as people move between having their income tax affairs finalised in either the PAYE system or self assessment,” said Miskin. “At the same time, the rules that dictate whether or not a tax return is required remain rather arbitrary.

“For the vast majority of people, their tax affairs may be straightforward for a lot of their life but there will always be periods when their circumstances change - for example, when they retire and have multiple pensions or they might have a rental property. By getting people engaged in the system, you avoid the cliff edge that has been created as to who needs to do a tax return and who doesn’t,” she added.

Can digitalisation cut the admin burden?

At the same time, growing digitalisation of the tax system and progress towards achieving the ambitions of the government’s Making Tax Digital (MTD) programme are paving the way for more radical tax system reform. Part of the rationale for a universal filing requirement for income tax is the need for a seamless experience for taxpayers as their circumstances change.

Anita Monteith, Tax Manager at ICAEW, said although the current UK tax system didn’t differentiate between the different types of business – from those with lots of fixed assets and premises to a sole trader with no assets, the MTD requirement for quarterly reports will look much the same.

“If the aim is to make better use of digital information, we need to make sure that we gather the most useful information, but in the least burdensome way,” Monteith said.

Launched with great fanfare in 2015, the personal tax account has not lived up to expectations as a digital-by-default, one-stop shop for personal tax information. “The financial affairs of the nation have changed and will continue to change for the next generation. The personal tax account needs us to engage with it. The challenge is for people to see how it can benefit them rather than seeing it as an additional bit of red tape,” Monteith said. 

Admin burden

Both Miskin and Monteith readily accept that universal filing would come with an increased admin burden for individuals. At the same time, the increasing amounts of data held by HMRC about individuals’ incomes could be used to prepopulate annual statements that individuals would  just be required to check and confirm to simplify the process.

“It could also be an opportunity for individuals to make sure they’re getting all the reliefs and allowances they’re entitled to, but this would probably need help from an accountant,” Monteith said.

The suggestion raises questions. Fewer ICAEW members advise people who aren’t in self assessment but who nevertheless pay income tax. The problem is whether there’s a market in the gap, rather than a gap in the market and whether that kind of annual review could be done at a cost that people would think was reasonable.

The Tax Faculty

ICAEW's Tax Faculty is 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.

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