Making Tax Digital: Transforming the tax system through better use of information

28 February 2017

 

Of the six Making Tax Digital consultations published in 2016, this document more than any other, promised the greatest impact for the employer via their payroll RTI returns.

 

Followers of the Making Tax Digital (MTD) paper, Transforming the tax system through better use of information will be very aware of the ambitious claims made in the initial paper, amongst which were:

  • Customers will never have to tell HMRC information it already has.

  • HMRC will use third party information it already collects more effectively to reduce under- and over-payments

  • HMRC will use third party information, information provided by customers through software, and information provided by customers directly into their Personal Tax Account (PTA), to calculate tax due.

  • Digital tax accounts will show a complete and up-to-date picture of what will be due and when

  • Over time, HMRC will look to extend the range of third party information providers where this reduces the reporting burden on customers.

All very promising? Certainly employers, together with payroll providers and software developers who have been ensuring that PAYE data is submitted in a timely and accurate manner since its introduction, must have been thinking ‘it’s about time’.

 

Increase in P6 notifications and employee queries?

During 2017 HMRC will begin to ‘work smarter’ using PAYE information that they are provided by the employer, the employee and third parties to amend tax codes more frequently and in as near to real time as possible, to ensure that tax due is collected, or repaid during the tax year rather than waiting until after the tax year has closed. Employers may notice that the flow of P6 notices increases and a number of employees may be impacted with a ‘double’ hit of tax collected where the tax code includes taxable income reported from the previous tax year along with an ‘in year’ adjustment for taxable income also. HMRC have plans to directly notify tax payers who will be affected by this during 2017.

 

Test & Learn with bank & building society interest (BBSI)

Throughout 2016-17 HMRC has continued to develop and test the design for making better use of BBSI data that they receive. They have been doing this by placing BBSI deductions in the tax codes of a selection of customers, when interest earnings exceed the personal savings allowance.

 

Communications

What is clear from the response document is that, whilst in the short term HMRC will maintain a more traditional method of notification i.e. paper and the postal system, in the long term the Personal Tax Account (PTA) will be a key communication tool for HMRC to try to help the tax payer and other customers understand their tax liabilities. And HMRC in its response to this paper have committed to transparency in displaying the third party information within the PTA – how transparent and how clear that will be has yet to be decided.  Secure messaging is being designed and taxpayers and HMRC customers will be encouraged to opt for digital notifications via this method as it becomes available.

 

Viewing third party information via the PTA

Respondents to the consultation favoured information to be presented in the PTA in a clear, simple manner using a simple layout and language, and knowing the source of the third party data was also seen as important by consultees.

HMRC has committed to transparency relating to third party information.

 

Information standards and security

In its response to concerns raised about the possibility of  HMRC being a ‘prime target’ for cyber-attack, HMRC has committed to working with third party providers to ensure that appropriate levels of security are inherent in data transfer protocols to ensure compliance with relevant data protection legislation.

 

Third party information and disputed amounts

The word ‘disputed’ will bring back many a bad memory of the first years of RTI for some and it raised its head during this consultation as well. HMRC has committed to carrying forward the same principles for self assessment over disputed data amounts, as they do with PAYE, ‘If we reach the end of the tax year and a query has not been resolved, we will make an estimated assessment using the information we believe to be correct, on the understanding that this assessment may change upon resolution of the query.’

 

The future and third party information

The digital tax administration of the future could see third party information being provided to HMRC that reports:

  • Lettings and rental income data

  • PAYE data

  • Investment income data

  • Gift Aid donations data

  • Chargeable event certificates data

  • Foreign income data

  • Trust income data

  • P11D data

  • Department for Work and Pensions data.

Much more discussion, debate and consultation between HMRC and all affected stakeholders is needed until a fully digital tax administration is achieved. This consultation paper, together with its five stable mates, covered a broad range of areas that affect business ‘customers’ and their taxes (which includes employers and PAYE) and individual ‘customers’ and their taxes (which includes employees, pensioners and PAYE).

This summary has merely skimmed the surface of this response paper and if it has whetted your appetite to know more, we would encourage you to read the government’s response.

 

As ever the policy team would value hearing from you and we thank all of you who share you views and experiences with us to policy.