Sometimes really important things have particularly unexciting titles. A prime example is HMRC’s call for evidence, The tax administration framework: Supporting a 21st century tax system, published on 23 March. My challenge in this editorial is to fire the imaginations of Tax Faculty members and unlock your ideas. Perhaps we could start by renaming it ‘Modernising the tax elephant one byte at a time’?

This call for evidence looks at the legislation, processes and guidance underpinning the administration of taxes and duties. While it doesn’t seek to change policy, for example by introducing new tax reliefs, it could look at how policies operate. The intention is to make the system easier to navigate, lighter on its feet perhaps, and hopefully make it easier to adapt to future changes.

There is certainly a digital theme developing behind this call for evidence. The aim is to build a system that is digital from the original transaction, through processing and reporting, taxing the profit and paying the tax, with everything happening very much closer to real time than it is now.

The objectives for the tax administration framework are set out very succinctly in Box 2.2 of the document, summarised below.

Accepting that safeguards and additional support need to be built in to assist those who require extra help, what then are the other issues?

Ways of working

Much of the tax system was designed for a pre-digital world. As more people become self-employed, many choose to work through a limited company. Add to that the potential ‘three person problem’ and the shadow of IR35/off-payroll working. Not only is the amount of tax different for each, but also the way in which the tax is self assessed. The time when and by whom it needs to be paid and reported are different.

The arrival of the internet and the gig economy has taken this to an entirely new level – one where VAT is now also becoming a bigger issue as working models are fragmented for all types of business, from mini cabs to building work. This call for evidence intends that tax administration should be more responsive to evolving ways of working and changes in how people wish to interact with the system, regardless of whether they are employed or self-employed.

We are likely to see digital online platforms and marketplaces playing a more significant role in the supply of third-party data to the tax system.

The legislative framework

The Taxes Management Act 1970 is more than 50 years old. It has been amended many times, to reflect changes such as the introduction of self assessment (SA), to enable electronic communication between HMRC and taxpayers, and to allow online digital tax accounts. Changes were also made following the powers review and again to tackle off/onshore tax evasion.

Unfortunately, successive fixes have sometimes created uncertainty and there have been instances where this has been challenged through the courts. One such instance was where taxpayers submitted voluntary tax returns without having first received a notice to file. Quite apart from the systems issues this caused, some taxpayers claimed that HMRC had no right to enquire into their returns, requiring legislation to eventually clarify the position.

International comparisons

A number of the changes being considered are essentially about the drive for a fully digital tax system for the UK. Many commentators hold up the system in Estonia as a great example and one to aspire to, but that is unlikely to happen here any time soon. The legacy tax structure in the UK is huge and HMRC’s multiple IT systems are highly complex.

HMRC’s PAYE and national insurance records were brought together into the National Insurance and PAYE System (NPS) back in 2009 – yet 12 years later, NPS is still not integrated with the SA system. A taxpayer’s tax liability for a given year will be established either as an SA case and their tax liability for the year will be determined upon receipt of their SA return, or it will be through an end-of-year reconciliation undertaken through the NPS.

Entering and exiting the tax system

The call for evidence notes that “a crucial component of tax administration is the obligation placed on taxpayers to register with the tax authority, notify the tax charges they are liable for, or otherwise be identified and brought into the tax system”. But there are currently different rules and obligations for different taxes and duties. This makes it much harder for taxpayers, particularly the unrepresented, to know what they should do and when.

There is the perennial problem of the time lag between a trader first starting in business and when they are required to report this to HMRC. As I write this editorial on 16 April 2021, if this was my first paid engagement as a self-employed journalist, I wouldn’t need to tell HMRC that my business existed until 5 October 2022, and I wouldn’t need to file my first SA return and pay tax until 31 January 2023. As professionally qualified accountants working in tax, we all know the problems this time lag causes.

We also know the lack of confirmed, up-to-date information about new businesses was the main reason many were excluded from Self-Employment Income Support Scheme grants during the COVID-19 pandemic. Quarterly reporting through making tax digital might go some way to addressing this in the future, but at what cost to business?

Meanwhile, there are different registration requirements for VAT. A business is required to register for VAT within 30 days of its turnover in the previous 12 months reaching the VAT registration threshold or if it expects its turnover to exceed the registration threshold in the next 30-day period.

Telling HMRC once

Recently, we have had reports of difficulties with capital gains tax reporting following UK residential property sales. First this caught out non-residents and now it is causing problems for some UK residents. The 30-day reporting and payment rule was a shock for them, so let us hope that these same taxpayers remember the gain needs to be reported for a second time on the SA tax return. Clearly HMRC’s systems should be joined up. But, built at speed, this isn’t always possible. Perhaps HMRC could begin by committing to no more freestanding systems, while planning to join up those it already has.

Just a suggestion, but perhaps when considering how third-party information might be pre-populated into tax returns, the government’s own freestanding IT systems could be viewed as third parties, too. Maybe then we might see these chargeable gains reflected automatically in the SA return.

Taking this idea one step further, the state pension and other taxable state benefits administered by the Department for Work and Pensions – and so always outside the PAYE system – might also be better integrated.

Music to the ears of our members is the stated ambition that, like simplified registration for taxpayers, agents should also only need to register and be authenticated once. By linking agent and taxpayer records, agents could be provided with a better service by HMRC. We would like to see this aspect become a core element of this change programme, properly reflecting the time and cost agents save HMRC by helping their clients to report income and pay the correct tax at the correct time.

This is an ambitious call for evidence. The closing date for comments is 13 July 2021. If you didn’t get the opportunity to join our webinar on 5 May, please do watch the recording and share your views on the call for evidence by emailing Caroline.Miskin@icaew.com or Anita.Monteith@icaew.com.

Summary of objectives for the tax administration framework

A revised tax administration framework should:

• provide certainty and appropriate safeguards for taxpayers;
• be flexible enough to adapt to changing circumstances and enable targeted support for taxpayers;
• support HMRC’s aim to make it easy to get tax right and hard to get it wrong;
• help build trust in a tax system that is recognised as fair and even-handed;
• be as simple and transparent as possible; and
• help reduce the cost for taxpayers of meeting their obligations and drive down the costs to the Exchequer.

Source: Box 2.2, The tax administration framework: Supporting a 21st century tax system, call for evidence, HMRC, 23 March 2021.

About the author

Anita Monteith, Technical Lead and Senior Policy Adviser, Tax Faculty