In almost every year for the past 50, the UK government has spent more than it has raised in revenue. It is therefore hardly surprising that the government’s finances were already stretched before the COVID-19 pandemic made them worse. Indulge me while I share some horribly shocking figures.

By June 2021, government debt had reached £2.21trn. For comparison, it was already £1.87trn in April 2020, and it’s no wonder it grew so fast. According to the Office for National Statistics, “the public sector spent more than it received in taxes and other income in June 2021, requiring it to borrow £22.8bn, the second-highest June borrowing on record”.

Those are eye-watering numbers when we consider that total tax receipts in 2020/21 were expected to be £873bn.

The recent Timely payment call for evidence, published alongside The tax administration framework: Supporting a 21st century tax system in March 2021, indicates the government’s interest in closing the period between the time when profits are earned and the tax liability is calculated and the time when it is paid. While that was a fairly ‘blue skies’ paper, there are clear indications that more regular calculation and payments following estimates that might flow from Making Tax Digital (MTD) submissions could happen within the next decade.

Meanwhile, as income tax brings in just under a quarter of total receipts each year and the expected take in 2020/21 was £208bn, I thought it was worth considering whether the government might look at other ways to use tax to increase revenue over the next year or two.

Two unimaginative approaches

The first options that come to mind are the usual tried-and-tested methods.

1. Rates, limits and allowances

The government could lower the higher and additional rate thresholds so that individuals pay higher taxes at lower income levels, or freeze thresholds and let inflation do its work. We could reduce allowances or claw them back from higher earners. But this is all unpopular with the public and clawbacks complicate calculations.

The government could raise tax rates, but having broken its commitment not to do this during this parliament, it seems unlikely that it would do so again.

2. Moving taxable profits

Changing the basis for taxing profits from accruals to cash moves tax receipts, but not always forwards. The cash basis depends on many factors and can’t be relied on to bring forward tax receipts, but it is simple and a lot of taxpayers like it because the tax due is better aligned with the cash they collect from customers. The cash basis limit for income tax is currently just £150,000, while for VAT it’s £1,350,000, so there could be room for manoeuvre here.

Less obvious ways to collect tax receipts earlier

It would be relatively easy to bring forward payment dates, perhaps requiring more payments on account for a year, or to advance the moment in time when any £1 of income gets taxed so that it falls into an earlier tax year. But there are more subtle technical changes that also work.

1. Payments on account

Income tax requires individual taxpayers who are in business to make payments on account on 31 January in the tax year and 31 July after the end of the tax year. For the year ended 31 December 2020, the basis period for 2020/21, the tax is due:

But why not require more than two payments on account? Or bring forward the first? I can see why the first is more accurate by aligning it with the previous year’s tax return submission date, but plenty of businesses would have a pretty good idea of what their profits will be several months earlier. These are, after all, just payments on account. Or could we keep the first where it is, but bring forward the second to, say, 30 April?

I am not recommending any change in particular, but just stating some alternatives that might be relatively straightforward compared with the changes currently being considered.

2. Proposal to revise basis period rules

The current proposals to change the basis period rules for income tax would change the tax years in which profits are taxed. Hypothetically, for our 31 December 2020 year end, three-twelfths of the profit would form part of the taxable profits for 2019/20, so:

Nine-twelfths of the profit would form part of the taxable profits for 2020/21, so:

The effect of this is that tax receipts calculated on three months of profits are moved forward by one year. It must be said that HMRC officials have emphasised to us that accelerating tax receipts is not the main aim of these proposals. However, it is clearly a beneficial consequence so far as the UK Exchequer’s receipts are concerned.

MTD ITSA connection

We have questioned, more than once, the purpose of Making Tax Digital for Income Tax Self Assessment (MTD ITSA). The response from government has not changed and we are assured that it is not about earlier payment of tax. Nevertheless, it is clear from the information that will be submitted quarterly for MTD ITSA, and the quarterly tax estimate calculation that HMRC seems determined to generate on the basis of the submissions, that a pathway is being built to permit earlier payment of tax, even though it is not going to be a requirement during this parliament.

It is unarguable that for those with simple business tax affairs, particularly those using the cash basis and who do not use an accountant, having a pay-as-you go system similar to PAYE for employees does have its place. This would bring the time when profit is earned closer to the time when tax is paid and remove the cash flow advantage/disadvantage (depending on your perspective) between employment and self-employment.

The current consultation, Reporting rules for digital platforms, would require platform operators to report certain information to tax authorities, cross border where appropriate, about sellers and the income generated through the website. HMRC would then know what rental income is generated by Mr Bloggs’ property rental in Norfolk, the details of the listing and how many days it had been let in a period, directly from the website operator. It seems such a modest step to require a payment on account to be deducted at source, particularly as we know that Mr Bloggs will be using this same information from the letting agent to prepare his quarterly MTD ITSA updates.

I worry this is all being rushed. Words and ideas are fine, but systems must be designed around new rules, be tested, and requirements communicated. And someone has to implement them – businesses, advisers and HMRC. There is generally some consultation, but not nearly enough. We seem to be moving from rough ideas to implementation far too quickly, bypassing the government’s own five-step implementation process whenever it suits.

Recently, ICAEW joined together with the CIOT, ICAS and ATT to ask the Financial Secretary to slow down the pace. Slotting the basis period proposals in ahead of MTD ITSA is just one change too many in such a short period. The MTD ITSA pilot has been very limited and few taxpayers could join now even if they wanted to because the functionality is not yet available.

But to return to earlier tax receipts, if we do need these then the government should say so. With a few carve-outs, most of the suggestions I make here could work.

About the author

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