The second of five areas in the Tax Administration Framework Review (TAFR) is ‘Improving the way tax liabilities are calculated and assessed’ and considers issues around how tax liabilities are established and finalised.

In its response to HMRC’s consultation on TAFR, published as TAXguide 65/21, ICAEW identifies as a priority the need to establish income tax and national insurance contributions, whether assessed and collected via PAYE or self assessment, and all capital gains tax liabilities (CGT) (for example including those for UK residential property) in a single system.

The current systems and processes are based on HMRC being able to divide income taxpayers into two populations – PAYE and self assessment – but taxpayers’ circumstances   are now more fluid and most will, at some point in their lives, be in a situation where they have income that cannot be dealt with wholly within the PAYE system.

CGT meanwhile is currently assessed in three systems:

• self assessment,
• the standalone system for gains on UK residential property, and
• the system for real time reporting of gains. 

The systems need to be joined up so that taxpayers have a consistent experience and to eliminate problems arising from data mismatches between systems (such as duplicate income tax calculations and non-collection of class 2 national insurance contributions).

The criteria for when a taxpayer needs to complete a self assessment return are determined by HMRC’s internal rules rather than legislation and need to be reviewed to make them less arbitrary.

ICAEW also recommends that HMRC reviews the dataset that it would like to hold in relation to income tax, for example HMRC may need to hold fuller data on investment income and private pensions.

Tax returns in a digital world 

In a digital tax system, a tax return may look more like a confirmation statement (ie, a calculation pre-populated with information provided by the taxpayer and third parties). This could be presented to the taxpayer who would be required to check and confirm the information.

In most cases the taxpayer would also be required to complete a declaration, but this might not be necessary where all the data has been provided by third parties and this would help with providing a consistent experience to all income taxpayers.

The right of a taxpayer to amend a return after it has been filed is identified as an important safeguard and it should be possible to track all types of post-filing changes though the digital tax account. There is also scope to make it easier to make disclosures and claims to overpayment relief, especially where the amounts are small.   

Tackle PAYE

ICAEW also highlights the need to implement the recommendations in the 2017 post-implementation review of PAYE real time information (RTI) and that HMRC does not make full use of RTI data to update tax codes.

PAYE tax codes have become much more complex and overloaded with different types of adjustment and it may be time to consider whether they are the best way to manage the amount of tax deducted through PAYE during the year.

Allowances, charges and other improvements

ICAEW has also suggested removing or replacing allowances and charges that undermine the principle of independent taxation, namely the marriage allowance and the high income child benefit charge which add considerable complexity to the tax system.

Other improvements that might be considered include reform of basis period rules, simplification of rates, allowances, and bands and a review of cliff edges and tapers in the tax system.

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