Where are we with the abolition of the personal tax return and the move to a digital tax age?

07 October 2016

For many months, hard information about what this would really mean in practice has been scarce. But this has now changed with the publication by HMRC of no less than six consultation documents dealing with the details of how the digital process will work.

It is beyond an article of the length of this one to set out all the details, but we know that all taxpayers will have an on-line ‘digital tax account’, securely accessible by them and acting as a means of accessing the information HMRC has collated, and adding to it. The account will bring together information from sources open to HMRC; employer pay and benefits details, bank interest etc.

New details emerge

For unincorporated businesses, there will be a requirement (except for some small businesses, including those with turnover less than £10,000 that will be exempt altogether) to upload information to their digital account quarterly from April 2018 . There will even be – for those who want it – the capability to pay tax as you go ahead of the statutory payment dates. There are, however, no plans at present to change, ie advance, payment dates (though this has clearly been considered and may well come back onto the agenda).

The consultation documents raise questions about how to simplify some aspects of how unincorporated businesses are taxed, especially where accounting periods do not correspond with the fiscal year, and plans to introduce a simplified cash basis of tax reporting for small property businesses (essentially small buy-to-let portfolios), and these are welcome.

The net effect of these changes will be to provide HMRC with information more quickly and in many ways more efficiently. Although it will have no new powers to raise enquiries based on quarterly reporting, HMRC will consequently have the capability to look at a taxpayer’s affairs more critically.

Efficiency… at a cost?

Digital tax reporting will undoubtedly help to make information processing more efficient and keep better track of whether individuals are paying the right amount of tax, as far as possible, as they go. However, there are obvious challenges in making this work. Businesses will need to have accounting software which enables them to comply with the requirement to upload information quarterly and this will be a cost to some. HMRC will pre-populate tax calculations from the third party sources it has and this introduces obvious challenges of ensuring that information is linked with the right account. Make no mistake that sooner or later additional requirements will be imposed on businesses to provide additional sources of information, such as company dividends, and this will increase the compliance burden on businesses.

Updated penalty regime

Tax penalties are another interesting aspect of the consultations. It seems likely that the existing regime for late filing penalties will move to an ‘escalator’ basis with higher penalties for repeat offenders and potentially more penal rates of interest on unpaid tax.

The way forward

Make no mistake that digital tax accounting for individual taxpayers is only the beginning of a process which will eventually (or maybe sooner rather than later) encompass corporates too. The opportunity is there to simplify the tax system for a great many businesses, perhaps by extending the cash basis to a much larger number of businesses, but still relatively small ones for whom movements of stock, debtors and creditors and other adjustments are pretty immaterial from year to year. The granting of a tax exemption on the first £5,000 of company dividends indicates a possible will to grasp this opportunity. Only time will tell.

For more information please get in touch with Jim Meakin or your usual RSM contact.

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