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
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.
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.
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.”
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