HMRC is proposing a number of changes to the tax compliance and administration regimes that will undoubtedly adversely affect taxpayers – personal and business. With a consultation closing in March, now is your time to comment. Jason Piper, a Senior Manager in Tax and Business Law at the ACCA, reports
January is always a good time to look ahead and make plans and HMRC is doing its bit to assist firms in that regard. With a raft of announcements in the November Budget speech there are a number of proposals that, when implemented, will affect how a business runs its tax affairs from 2018 onwards.[wlm_nonmember][…]
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However, with some judicious feedback into HMRC, it may be possible to shape how the proposals are implemented. Experience has shown that when merited, HMRC does listen.
Take HMRC’s Making Tax Digital (MTD), an initiative under which businesses would have been required to report on their affairs, not annually, but quarterly and online with the attendant extra workload and costs. Few other than HMRC liked the idea and the outcry led to MTD being shifted back; now it’s only VAT which is absolutely guaranteed to be compulsory – from April 2019.
However, public criticism hasn’t stopped HMRC moving forward with plans and supporting framework for MTD. It’s going to be a huge shake-up for most businesses – so if you haven’t started planning for MTD yet, you most certainly should.
Compliance penalties
So, while we might not yet be clear on what “getting it right” looks like for MTD, we can be certain that HMRC has been putting plenty of thought into how to deal with anyone who gets their tax compliance obligations wrong. For several years now there’s been a steady stream of HMRC consultations on what penalties are for, and how it can achieve compliance.
Points-based penalties
Based on those responses (and having seen HMRC’s process first-hand, I can assure you they did take the responses into account and so modified their approach) the Government is reforming the penalty system for late or missing tax returns so that soon there will be a new points-based approach in place. The details are all in a document, see bit.ly/2ASN8pU, but in essence you will start accruing penalties on annual returns after two defaults, for quarterly returns after four defaults, and for monthly returns after five. To reset the score to zero you need to make two, four or six submissions on time for each return type respectively. Your scores run independently for each tax (VAT, PAYE, CIS and Income or Corporation Tax) and “[taxpayers] with more than one business will… be required to provide an individual regular update for each business.” If you think this all sounds complicated then, yes, that’s probably because it is.
Alongside this new system the Government “will also consult on whether to simplify and harmonise penalties and interest due on late payments and repayments. This will ensure that the system is fair, simple and effective across different taxes. Final decisions on both measures will be taken following this latter consultation” (from the Red Book of Budget Measures (at bit.ly/2je9Wpf).
Grace periods
Nothing has yet been costed (at least publicly) for any of this, perhaps because the earliest they expect the new points based system to take effect is 2020, while the other measures are still at consultation stage (see bit.ly/2iybKgm). But, because they’re still consulting, you can still make a difference by getting in touch with HMRC to make your views known. The proposals include a suggestion that penalties for tax paid late should be like a parking fine, and halved for prompt payment, with a 14-day grace period where no penalty would arise at all. Interest rates would change, and the existing VAT surcharge model would be replaced. But one of the conditions to get a penalty reduced is that if you can’t pay, you will have sought to finalise a “time to pay” arrangement with HMRC; if that can be done within 14 days there will be no penalty, if completed within 28 days the penalty will be cut by 50%. The professional bodies aren’t convinced that HMRC can meet its side of the bargain to have time to pay arrangements in place within those time frames. If you’ve ever had to deal with HMRC you’ll know that it’s fair to question the realism of the proposal.
Operating PAYE
Moving on, for those businesses with employees there’s a further planned tweak to the operation of PAYE codes through the Real Time Information (RTI) system.
Since May 2017 you may well have noticed an uptick in the number of PAYE codes you’ve been receiving for employees – and perhaps the number of queries from them that you’re having to field as a result. This is all a part of the new system of “dynamic coding”, or PAYE Refresh – bit.ly/2B1XzXU – as it’s also been called by HMRC, which aims to use the information that HMRC is gathering from various sources, not just employers, in order to try to estimate an individual’s total annual income, and from that work out what their final tax bill is going to be and adjust things on the fly accordingly. However, based on results so far, the system is struggling with irregular amounts like bonuses, commission or variable pay – let alone things like dividends, or income from overseas.
Dynamic coding
The solution to many of these problems associated with dynamic coding lies not with HMRC or the employer, but with the employee. Like it or not (and my suspicion is that more people than HMRC would want will definitely not like it), the easiest way to resolve the issues is for employees to activate their Personal Tax Account (PTA) – see bit.ly/1O4EOoo – so that they can check the amounts charged for themselves.
There is a degree of logic to this. The whole idea behind tax codes is that they preserve some confidentiality for the employee by not giving their employer a definitive picture of exactly how much income they’re getting and from where – all the employer knows is how much (or little) each employee has left of their personal allowance, without any indication as to why the numbers might vary.
In principle, of course, it’s a good idea for everyone to know exactly what’s going on with their taxes – what they’re paying, and why (both where it’s going, and how the amounts are calculated). However there’s a balance to be struck here, and quite a few people feel that HMRC has gone too far down the “forced engagement” route here.
One of the big advantages of the PAYE tax withholding system, and in particular the tax codes it uses, is that it should save a taxpayer in steady employment on a steady wage having to constantly think about their tax position; it should save them time, let HMRC know what’s going on, and allow the system to collect the right payment at the right time. But with the constant fine-tuning of liabilities (or as some might call it, tinkering) HMRC has created a model where employers will be getting code updates far more frequently than they previously might, and that’s something which in the short-term is going to prompt more queries from employees. Whatever HMRC might say about referring to an employee’s own PTA, plenty of individuals are still going to query their affairs with their employer first (especially if they’ve ignored the HMRC notification, and only noticed that their monthly payslip has a smaller “net payment” number on it than last month).
Faster tax debt recovery
There’s another change that few seem to know about. With the announcement of “Faster recovery of Self-Assessment debt”, HMRC will be using technology to recover additional Self-Assessment debts closer to real-time by adjusting the tax codes of individuals with PAYE income. This change will take effect from April 6 2019 – see bit.ly/2je9Wpf – and estimates see this measure raising £125m across the life of the current parliament, although interestingly nearly half of that falls in the first year of operation. It’s doubly interesting given that the first results of HMRC using RTI information to try to reduce the level of inaccuracy in the system saw them issuing around 8 million P800 (notification of wrong tax paid) forms, two thirds of which were for refunds where the taxpayers involved were not earning enough to actually pay tax in the first place. So, if the first round of dynamic coding effectively accelerated repayments by replacing the P800 forms with in-year adjustments, HMRC will now think they’ll be identifying tax that hasn’t yet been paid by Self-Assessment taxpayers, but which should have been. In simple terms, this means HMRC will be adjusting employees’ take-home pay downwards more often than upwards, so be prepared for the queries.
To conclude
HMRC is clearly under pressure to both cut costs and bring in more tax revenue, all without the Government openly increasing tax rates. Technology is aiding HMRC’s compliance but in so doing, it’s moving the burden from the state to the taxpayer for whom ignorance is no defence. Quite simply, unless you want to be burdened with whatever HMRC gets passed, you need to feedback into the process. You’re unlikely to stop it but you may be able to shape how these proposals are implemented.
Comments can be sent to HMRC via [email protected], ideally by March 2, 2018.
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