Digital tax accounts: Big Brother?
Most businesses and individuals have an online presence and, in recent years, there has been a move towards online tax reporting and electronic…
Most businesses and individuals have an online presence and, in recent years, there has been a move towards online tax reporting and electronic payment of tax.
VAT was one of the first areas of tax that was impacted by the online revolution, with nearly all VAT registered businesses being required to register and file their VAT returns online since 2012. This was swiftly followed by the introduction of real time PAYE reporting in 2013 which again only has very limited exemptions from online payroll reporting requirements.
Against this backdrop, the announcement by the government in last year’s budget of the intention to move towards a fully digital tax system and the introduction of personalised digital tax accounts should perhaps not have been such a surprise.
The aim is to have a fully digital tax system by 2020 and, to that end, the government has now published the "making tax digital" roadmap. The roadmap sets out the intention (and timetable) to establish digital tax accounts for five million small businesses and 10 million individual taxpayers by early 2016 and for every UK individual and small business to have a digital tax account by 2020.
For individual taxpayers, HMRC will update the digital tax accounts by reference to the information it receives from third parties (for example, from employers and banks) and businesses will be required to use software and apps that feed in information directly to HMRC systems (and HMRC will ensure that free apps and software are available for this purpose). Over time there will undoubtedly be a reduced administrative burden and potential reduction in costs and it will avoid taxpayers having to report information to HMRC that it already holds.
It also means that for, many people, particularly those who only have employment income and some savings, there will be no need to fill in an annual tax return as their digital tax account should automatically be populated with all the relevant information and tax calculations. It is when looked at in this context that the introduction of the £5K annual dividend exemption that comes into effect from 6 April this year begins to make more sense.
The digital tax account will therefore gradually replace the current UK self assessment system but has led to concerns in some quarters that it could actually increase the compliance burden. This concern is evidenced by the intention, from April 2018, to impose an obligation upon small businesses, landlords and self employed individuals to review and update their digital tax accounts “at least quarterly”.
No matter how much the government and HMRC may try to couch the changes as being made to benefit taxpayers (reducing administration, saving costs and allowing greater flexibility), what cannot be avoided is a feeling that the real driver is to move away from reporting and paying taxes in arrears towards something that equates more closely to real time payment and reporting of taxes. In effect, the digital revolution is less about flexibility and reducing administration (at least for HMRC) and more about collecting taxes sooner and reducing the risk of non-compliance and bad debts. In this respect, it is interesting to note that in relation to large companies and groups, who will not be impacted by these changes, draft legislation has already been published to accelerate the timing of their payments of corporation tax so that they will required to make quarterly payments on account of their anticipated corporation tax bill in the 3rd, 6th, 9th and 12th month of their accounting period (which is four months sooner than is currently the case).
What is certain is that change is inevitable. The move towards a digital tax system is gaining momentum and, for the most part, something that we will all need to embrace and prepare for. The current proposals and timetable are however hugely ambitious and one only has to look at the recent track record of successive governments in implementing IT projects (such as the recent project to computerise the patient record system across the NHS) to have real concerns that the government’s ambitions exceed its reach. Many experienced tax professionals and commentators have already expressed a view that it is highly unlikely that a project of this scale will be completed within the proposed timetable as there will invariably be a number of problems and issues as we move toward implementation.
The role of agent / tax advisers is also something that needs to be explored. For example, one potential area of concern is that although HMRC has acknowledged that authorised agents will be able to access and update the digital tax accounts on behalf of their clients, the current indications are that this is likely to be subject to certain standards to be set by HMRC. Does this mean that taxpayers’ agents who help implement tax planning schemes or strategies which HMRC do not like will be disbarred from acting? Could this regime be used (or abused) to put pressure on taxpayers not to put in place any tax planning arrangements?
There is still a lot of work to be done in refining the proposals and Parliament is due to debate the introduction of digital tax accounts later this month. HMRC has also announced that it will be running a series of consultations. The introduction of digital tax accounts is therefore something that we can all expect to hear a lot more about over the coming 12 months.
If you are interested in finding out more about this or any other taxation issue, please contact Haydn Rogan, a partner in the Corporate department, on 0161 214 0517 or email firstname.lastname@example.org.