As part of the government’s first Tax Day on 23 March, HMRC launched an innocuous-sounding call for evidence: “The tax administration framework: supporting a 21st century tax system”. Don’t be fooled by the bland title, “TAFR” is examining the foundations of the entire UK tax system and could be the starting point for its complete overhaul.

The scope of the call for evidence is staggering, encompassing legislation, processes and guidance. It’s looking at opportunities to improve every aspect of tax administration from how taxpayers enter the system to whether better use of data could change how assessments are carried out. And while TAFR doesn’t seek to change policy, it could impact how policies are implemented.

In line with HMRC’s 10-year tax administration strategy published last summer, the intention is to make the system simpler to understand, easier to navigate, more flexible and able to adapt to change in the future.

“The more I read the different elements of the paper, the more I can see a big digital plan for the future,” says Anita Monteith, Technical Lead and Senior Policy Adviser at ICAEW.

The vision: a digital system from end to end

The government’s aim, explains Monteith, is to build a system which is digital from the original transaction, through processing and reporting, taxing the profit and paying the tax. Everything happening much closer to real time than it is now.

“At the heart of TAFR is how to deal with information digitally,” says Monteith. “It’s about more logical recording of data and more timely access to it.”

According to the paper, a modernised registration process for tax should be straightforward, with minimal manual intervention, and only require taxpayers to provide HMRC with data once.

For data that needs to be inputted to the system as part of assessment, the vision is for HMRC to request it at the right time and to receive it only once. If HMRC gets it right, this would mean that those paying capital gains on UK residential property would not, as they have to do now, report the gain within 30 days and then enter it again on a self assessment tax return following the end of the tax year.

HMRC believes that digitalisation will then provide opportunities for estimating tax liabilities and processing tax reliefs in real time, as well as for simplifying assessments through the pre-population of data from third parties.

The paper also suggests that there are opportunities to harmonise assessment approaches for different taxes in a bid to make compliance easier.

The challenges ahead

The future tax system as envisioned by TAFR is one that will be welcomed by taxpayers, agents and HMRC alike, but there’s no denying the scale of the challenge.

The legacy tax structure in the UK is huge. The Taxes Management Act is more than 50 years old, while HMRC’s multiple IT systems are highly complex and often standalone.

Monteith highlights the example of the National Insurance and PAYE System (NPS) which brought HMRC’s PAYE and National Insurance records together back in 2009. “Twelve years later and NPS is still not integrated with the self assessment system,” she says.

With platforms built at speed to serve a specific purpose, it hasn’t always been possible to ensure that HMRC systems are joined up. Monteith suggests that a first step on the path to integration and a digital future is for HMRC to commit to no more standalone systems.

She also believes that HMRC should consider viewing the government’s free-standing IT systems as third parties when looking at how third-party information might be pre-populated into tax returns.

Never too early to be prepared

It is clear that TAFR is the first step on a long journey for the UK’s tax system. It will be several years before the digital end-to-end tax system of the future arrives, but that doesn’t mean taxpayers and agents can ignore the direction of travel.

The call for evidence and the consultations that will follow are important opportunities for stakeholders to get involved to help shape that vision and make it as accessible as possible.

It’s also time for taxpayers and agents to start preparing for the digital tax system, according to Monteith. “If I had to give one piece of advice now, it would be sort out your record keeping so it is digital,” she says.

“Don't try and take a shortcut, take the time to find a solution that meets your needs. Shop around and make sure you understand the product and choose one that will have some longevity. That way it will be your software provider who is going to be doing the heavy lifting to meet the requirements in future.”

Find out more

• Anita is hosting a webinar on TAFR on 5 May that is free to all ICAEW members. Register to attend.
• Read the TAFR call for evidence.
• More articles on the future of tax.