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MTD third party data: The challenges

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18th Aug 2016
Freelance journalist
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HMRC this week set out how it plans to expand the use of “third party” information from banks, employers and pension providers to make the tax system digital by 2020 and end the requirement for annual tax returns.

The plans, published on Monday in its Transforming the tax system through the better use of information consultation paper cover how information will reach the online tax accounts, processes, technical challenges and support for small businesses to help them cope with the changes.

HMRC said the use of third-party data will benefit taxpayers – for example by reducing errors and enabling taxpayers to report more information about their income digitally through their digital tax account, closer to real time, rather than through an annual tax return.

However, some suppliers and accountants said that the deadlines for digitising the tax system may be unrealistic because the details for building software interfaces between bank accounts and software packages still have to be agreed.

The paper goes into more detail on specific information sources, summarised below.

Tax codes and PAYE data

From 2017, HMRC will start to use PAYE information during the tax year to calculate whether the right tax is being paid and to notify customers where that is not the case through the digital tax account.

If information suggests that someone is not getting the full benefit of their tax allowances and reliefs, HMRC will automatically instruct their employers’ payrolls to make a re-allocation that will prevent an under-payment or over-payment accruing at the end of the tax year. The adjustments will be explained in the digital tax account.

This will be of particular benefit for customers who have seasonal work or with multiple PAYE income sources, especially if they continually move between the basic, higher or additional rates of income tax, HMRC said.

HMRC said that because more frequent updates to PAYE could affect employers due to an increase in employee queries, it will design digital tax accounts to mitigate this.

Bank and building societies – interest calculations and tax

HMRC will include common income types in the in-year calculations of tax on a more frequent basis, starting with bank and building society interest from April 2018.

Personal savings allowance

HMRC said that that the default procedure will probably be to collect any additional tax owed via PAYE. Customers will be able to opt out and pay this tax separately.

For customers whose tax is collected via PAYE, current rules would still apply. For example, if a customer moves from a higher paid job where they are experiencing ‘higher rate’ PAYE deductions to a lower paid job where their employer makes PAYE deductions at the ‘basic rate’, HMRC would see this change when the new employer submits the payroll data via the Real Time Information (RTI) system submission from their new employer.

HMRC will use information from employers and bank and building society interest to do tax calculations during the year, rather than waiting until year end.

It will tell employers if they need to change their tax code during the year. It will tell employees how this may change their tax bill by updating their digital tax account.

Information standards and security

  • HMRC said that it will only use information to calculate tax if it’s confident that it has the right information for the right customer.

  • It will not keep third-party information for “longer than is necessary” and will work with third-party information providers so that “information is submitted in an agreed format, is complete and to the required quality standard.”

  • HMRC said that it will tell taxpayers which third-party information, such as banks and building society accounts, it has used to calculate their tax bill so that customers can check that information is accurate.

  • It also said that it will not collect “historical information” from third parties.

Jointly owned taxed assets

This is one of the more complicated parts of tax and the move to digital tax records.

HMRC said that for jointly owned assets it will assume that tax liability is shared equally.

Perhaps more controversially, HMRC wants to hear opinions on whether a third-party information provider who knows how the ownership of a joint asset is split, should be required to tell HMRC.

Banks and building societies already tell account holders when they are paid interest. Employers are required to inform employees of their PAYE deductions. In future, one option might be that these notices clearly explain that this information has been given to HMRC and will be reflected in the taxpayer’s digital tax account

Tax queries

When taxpayers need to tell HMRC about changes in their circumstances they’ll usually do so by updating their digital tax account. If a taxpayer is not able to change information, such as an amount of interest, he or she can tell HMRC which will not use the information in tax calculations until the query is resolved.

If the matter not been resolved by the end of the tax year HMRC will make an estimate but can change it later.

Data standards

The first version of data standards will include naming “conventions, descriptions, data type and taxonomies.

Later versions will probably include business rules, ownership, access rights to data, compliance with legislation and protection of data assets.

HMRC said that next month it will work on the data standards with industry experts and third parties.

IT concerns

The consultation ends in November but some accountants and software suppliers have already said that the deadlines for phasing in digital tax records may be unrealistic. They said that more detail was needed soon so that suppliers would have time to write the digital-tax record software (including a free version).

HMRC said in the consultation that it will release new “APIs” (application programming interfaces) so that it’s systems can send and receive data from tax and accounting software suppliers. But until the technical details are finalised suppliers can’t start developing the software.

Steve Checkley, director at TaxCalc, which makes tax and accounting software, said that, like any consultation, it answered some questions and created new questions.

“The one major concern is that this is coming in 2018,” he said. “Software does take time to develop and this consultation isn’t the final solution. It will help software suppliers make educated guesses about where their software portfolios need to head but doesn’t give concrete direction as to what needs to be done.”

He recommended that HMRC publish an update on feedback from the consultation (and its thoughts on how software can support the move to a digital tax system), before the consultation ends in November.

“Interim updates would be very useful for us as a software supplier,” he said. "It'd help us with our plans for products that we will be developing. It’ll also help our customers, accountancy practices, by giving them certainty and help them explain the changes to tax records to their clients.”

Chartered accountant Elaine Clark said that the deadline of April 2018 was “foolhardy” and should be extended.  

“We’re one step from a feasibility project, [HMRC has] just got an airy fairy objective of ‘we’ll make tax digital”… HMRC hasn’t got technical interfaces [for MTD]. It hasn’t said what data you will have to report, so software suppliers can’t design software for it.”

If you'd like to find out more about Making Tax Digital, you can also click here to register for AccountingWEB’s live digital MTD conference in October.

AccountingWEB is working with Thomson Reuters Digita to collate the profession's feedback to the MTD consultation documents. You can participate in our quick survey here to share your thoughts. The survey responses will feed directly in to the official AccountingWEB response to the consultation documents.

 

Replies (8)

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By DMBAcc
18th Aug 2016 12:27

Pigs on the runway, engines running .........

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Morph
By kevinringer
18th Aug 2016 13:19

Making Tax Digital? It already is - I've been 100% efiling SA since 1998.

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By kjevans
18th Aug 2016 14:06

It's now pretty much impossible to even see your SA information. If you haven't got a passport, you can't login. You have to register with a third party, answer loads of questions about your bank accounts and service providers (and those question aren't at all clear - they thought my internet provider was a mobile phone provider and couldn't deal with the fact I have multiple mortgages from the same provider; I had to guess which one they meant) and then you still can't login without using a special verification URL from that third party. And how will two step verification work with self assessment tax software? Surely, it can't? And they start this just when people are thinking about doing their SA returns. Epic fail.

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Replying to kjevans:
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By DMGbus
18th Aug 2016 19:10

It's a simple concept really...
Make Tax Difficult ("MTD" for short).
This MTD concept has already been implemented for claiming the transferable allowance between spouses, helping HMRC reduce the cost of this what was a poltically "good headline" government measure.
Regarding the MTD application to SA filing the benefit to HMRC will most likely be increassed non-compliance penalties - what a cunning plan - make it more difficult to comply and watch the penalties roll in.
There is, by the way, no truth in the mischevious rumour that corruption is at the heat of the MTD project - there is absolutely no evidence that of software or consultancy companies benefiting financially and sharing their increased profits with any politicians or political parties.

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By richardterhorst
18th Aug 2016 15:04

I am too old, lazy and just a difficult person to start registering for on-line with 3rd parties with lost of questions. So I will never know what my account is or not is. Not worried as I am qualified so can work it out fine thank you.

But..., most of my clients do not want any involvement in their tax other than paying my bill. Then getting them to register.... and pigs fly.

Then, as an agent no access, to get them to tell you. Hey I struggle to get info out at the best of time.

I am all for digital but if life is made so difficult for tax payers they will just ignore it until they figure out HMRC has got it wrong (again?).

Make registering simple AND give agents access. Win win situation as opposed to lose, lose.

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By RichBatoul
18th Aug 2016 17:20

MTD? I thought it stood for Muddled Tax Department.

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Replying to RichBatoul:
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By DMGbus
18th Aug 2016 19:02

MTD = Making Tax Difficult.
The business case for MTD is that if it makes compliance more costly / more difficult there will be an increased revenue stream for HMRC from penalties for non-compliance.
A really simple concept in fact, but never to be admitted as fact.

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By RICHARDBIBBY
19th Aug 2016 14:18

HMRC haven't got a clue!

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