How to build a trusted, modern tax administration system
Anita Monteith shares her thoughts on HMRC’s approach.
After months of planning and preparation, involving considerable stress and cost for some, but less so for others, MTD for VAT (MTDV) went live with a fanfare from April 2019. If anyone had told me then that the announcement of the extension of MTD to income tax would go largely unremarked because a global pandemic was making headlines instead, I would have suggested that they read too much dystopian fiction.
On 21 July 2020, as the UK began to emerge from total lockdown, the Financial Secretary to the Treasury announced the government’s vision for the future of tax administration in the UK, under the snappy title Building a trusted, modern tax administration system.
Single account for individuals
For some years now, the government’s ambition has been that taxpayers should be able to view their tax position and tell HMRC anything it needs to know through a single online account, yet still the personal and business tax accounts (PTA and BTA) remain separate for even the most straightforward tax affairs. A single digital tax account for all taxpayers is a key component of the government’s vision, yet we continue to see more standalone systems having to be built to accommodate new tax policies being bolted on, such as for capital gains tax 30-day reporting.
When I had the opportunity recently to interview Roy Wallace, Director of Customer Strategy and Tax Design for Making Tax Digital, I put it to him that we seem to have been waiting for a single view for quite a while now. Did he consider it realistic that HMRC would have built such an online account for individual taxpayers by 2023? Or will MTD for income tax self assessment (ITSA) start without it?
His unsurprising reply was that it would take time: “Ensuring that all taxpayers have access to a fully complete, single account containing all taxes and duties is one of our core and long-term ambitions, but we recognise that the delivery of this will take several years.
“We will take an iterative approach to delivery, addressing the biggest pain points for customers first. We know from the wealth of evidence we have gathered that income tax and its relationship with BTA/PTA is one such pain point, and it will therefore be one of our earlier services to develop.”
I have reflected on this and do wonder whether we might be doing things the wrong way round. Is personal tax in a state fit to be digitalised, or does it need some serious pruning first?
The July 2020 paper is about how HMRC is building a better administration system by taking digital to the existing system. So how could this be improved?
Tax year end
My first challenge is to the tax year itself. Is it really helpful or necessary to have a tax year ending on 5 April? Why not use 31 March? Even better, we could adopt a calendar year basis; 31 December would be more competitive internationally and would help with those cumbersome double tax relief calculations. Ireland changed to 31 December in 2002 when it joined the Euro, and I doubt anyone there misses 5 April.
I suggested this possibility to the Treasury Select Committee when giving evidence to its inquiry into Tax after Coronavirus. I also suggested it to the Office of Tax Simplification and discussed it with Roy Wallace during the interview. Most agree this would make tax reporting under MTD simpler and is a worthy long-term ambition. But no one wants it now.
Wallace felt there was not enough time before 2023 to make the necessary changes. I can see his point. The tax year 2021/22 is the one and only opportunity to have a trial of MTD ITSA end-to-end ending with the 31 January 2023 tax return filing deadline, before the full system is mandated on 6 April 2023. For the record, I am not counting the very small trial that has already taken place, because it didn’t include much texture or depth.
The basic rules for MTD will mean VAT returns are for quarters aligned to month ends, but income tax returns will be to 5 July, 5 October, 5 January and 5 April. Whatever we do, there is either a five-day fudge or a five-day difference to report. So why build a system based on something we can see is misaligned?
The laws on governing tax administration do indeed need to change, as the paper says, but bringing all of a person’s records together in one place doesn’t make better sense.
Payment on account rules
The payment on account rules are incomprehensible to most members of the public. A pay as you go option, running alongside the cash basis and fixed rate deductions, might be very popular with people with simple self-employed trades who fear falling behind with their tax. This is not a new idea and is probably not appropriate for very many good reasons for lots of our members’ clients, but building the structure for this option now could remove a lot of people from the payment on account system sooner rather than later.
Remembering that MTD is about moving to digital record keeping, how else can we make these digital records work better as a basis for taxing profits? Opening year rules, overlap relief, change of accounting date, accruals, and materiality (no such thing in tax) all conspire against simple tax for the small business. The cash basis and fixed rate expense deductions could be used more. The cash basis is the default for taxing property income, but accruals is the default for trading income. Let’s just use the same default for both. The default accounting date for a new start-up could be 5 April (or 31 March or 31 December in my brave new world).
The Office of Tax Simplification (OTS) has a back catalogue of excellent suggestions for simplifying tax (although not even the OTS has suggested changing the tax year). It is time to be bolder and decide what tax system we want before we spend a lot of money digitalising the old rules.
Can the journey really be digital?
MTDV should have taught us some lessons for MTD ITSA. The nature of each trade will lead to compromise and the tax rules coping with these must be capable of working for the business. For example, a truly digitalised system with digital links all the way through to the VAT return submission is almost impossible where the business is partially exempt. Can the journey realistically be digital throughout if the business has to revert to warehouse space or hours worked to calculate the input VAT recoverable? Should we maybe abolish the VAT exemption so MTDV can work properly?
Complexity in tax policy stands in the way of properly digitalising tax administration, and income tax is going to be harder than VAT. Wallace says that HMRC is fully committed to meeting its strategic ambition for agents to see all that their MTD clients can before April 2023, but I would be much more confident if the tax rules could be given a serious prune first.
We understand that before Christmas HMRC will be releasing many more of the application programming interfaces, which will enable more businesses to join the pilot starting in April 2021. So far, only six software products are listed on the HMRC pages of gov.uk, but things are moving quickly as there is a lot at stake.
ICAEW has set up its own working party to consider possible changes that could make digitalising income tax easier. If you have an idea or suggestion, please email Anita.Monteith@icaew.com.
About the author
Anita Monteith, Technical Lead and Senior Policy Adviser, Tax Faculty