In March 2015 the Chancellor announced that tax returns would be abolished. Some might be thinking about how this will be achieved, as they go through the sometimes painful annual process of gathering information to send to their adviser to complete their return in time for the deadline.
Of course, much of the information for the tax return is already known by HMRC and this is one of the reasons it is keen to simplify the tax compliance regime. We expect January 2016 could be the last tax return deadline of its kind for many individuals.
The plan is that by early 2016 five million small businesses and ten million individuals will be in the new regime and by 2020 all 50 million taxpayers and entities will have their own ‘digital tax account
HMRC hopes that eventually the accounting packages of small businesses will feed directly into HMRC’s system on a real time basis, so there will be no need to complete an annual return separately. Based on HMRC’s progress on similar smaller projects, five years really is a tight timescale to make such a significant shift and it remains to be seen whether HMRC will really be able to keep up the momentum.
Around 10 million tax returns are issued by HMRC each year and the first 10 million digital tax accounts will be in place next year. Whether this is the same 10 million people remains to be seen. However, by 2020 at the very latest, virtually all individuals and small businesses that currently complete a tax return are likely to be in the system.
Bigger picture impact
While HMRC is yet to issue much information on how this will work in practice, what is clear is a vision of a new world where HMRC’s primary relationship is directly with the taxpayer and not via an agent. That leaves open the question of how taxpayers who have complex affairs where judgments are needed on what they report, or those who are busy and who would prefer having an agent between them and HMRC, will be dealt with. There will be a role for agents in the new digital world but that may look quite different to what it currently is.
To get the maximum benefits from the digital environment, particularly for smaller businesses, simplification of the tax system is, in our view, essential. We hope that the Office of Tax Simplification’s review of small business taxation will be conducted in close collaboration with HRMC’s digital strategy team.
Whatever happens, over the next five years there will be significant changes for taxpayers and their interaction with HMRC. The Government says this will provide a better customer experience, and if it all goes to plan will generate huge cost savings. Whether individuals and businesses will themselves see the benefit of those cost savings remains to be seen…