Digital Tax Accounts
HMRC want to make better use of Digital Tax Accounts to include information from third parties. This will result in outstanding tax being collected ‘in-year’.
The current position
HMRC currently obtains third party information from banks, employers and government departments. However HMRC still ask customers to collate this information and report it on a Tax Return. This means that the customer will only find out about under/over payments after the end of the tax year.
HMRC believes that PAYE does not accurately reflect the current job market & lifestyle of customers. Often there are second jobs, casual work and fluctuating incomes. The aim therefore is to identify and collect more tax throughout the tax year.
Changes in the next 2 years
Oct 16 – Starting with customers whose interest is above the Personal Savings Allowance, this will be included in PAYE codes based on an estimate from previous years (already used for higher/additional rate).
Apr 17 – PAYE information will be used during the tax year to calculate whether the tax is correct and notify customers through their Digital Tax Account if not. Under/over payments will then be collected throughout the year by HMRC automatically instructing employers’ payrolls, in order to prevent these accruing at the year end. More admin burden will fall on employers’ with the increase in P6 notices but HMRC hope that these will be automatically updated on payroll software. However employers’ will also have to deal with more queries arising from employees about their tax calculations.
Apr 18 – Include common income types in the in-year calculation – starting with bank interest so that only a small number of customers will be affected first. The default position will be to collect any tax owed via PAYE – but customers can opt out and pay in one lump sum. State pensions could be next on the list to include in the in-year calculations.
If it is not possible to collect the tax owed via PAYE, customers will be advised of the projection of tax due for the year end through their account. In theory, this tax amount will be updated throughout the year based on real time updates of bank interest etc.. They can make payments through ‘Pay As You Go’ rather than one lump sum.
Concerns – quality of information
HMRC advise that they will only use information to calculate tax that they are confident is correct. Customers cannot change information such as the amount of bank interest on their digital tax account. They will need to contact the bank and get it resolved. This places the burden on the taxpayer. Whilst a query arises, they can tell HMRC this is happening and HMRC will not use this information to calculate any tax. If the query is not resolved at the year end, HMRC will use estimates to produce the tax assessment for what they believe is correct.
Jointly held assets will be assumed to be split equally unless HMRC are told otherwise. There is the scope to look at whether third parties should be telling HMRC in what proportions assets are held.
HMRC wants to reduce to a minimum the amount of information customers provide to them. The next steps could be dividends/ share information and property information obtained directly from third parties.
HMRC want to increase the collection of third party information in order to reduce the admin burden for taxpayers. They believe that an up to date projection of tax to pay at the year end will help budgeting.
The consequences however will be:
- those less able to ‘get online’ will be left at a disadvantage by having to wait longer to know their tax bill
- if third party information is incorrect, the burden will be on the taxpayer to sort it out
- any incorrect third party information could be included in the year end ‘estimate’ and paid by the client under ‘Pay As You Go’ – potentially by direct debit
- if third parties tell HMRC how jointly held assets are owned, does this raise questions of privacy/security
- the admin burden will fall on employers to keep up with employee queries on tax calculations
- as HMRC expands their idea of what can be collected via third parties: pensions, rental income, dividends there is more scope for errors and the burden is on taxpayers to find the time to sort it out. Otherwise they will be paying ‘estimated tax calculations’ automatically from their bank account (via direct debit).
Summary of Consultation Questions
- Question 1: Where events during the year result in a change to a customer’s tax projection, what is the appropriate format and regularity of notification that HMRC should send to employers and customers?
- Question 2: Have you any suggestions for how we present third party information in your digital tax account in a way that will make it easier for you to understand your tax?
- Question 3: If you are concerned over privacy impacts of HMRC’s plans for improving how we use third party information we already receive, do you have any suggestions for how these concerns could be resolved?
- Question 4: If a third party information provider is aware of how the ownership of a joint asset is split, do you think the third party provider should inform HMRC?
- Question 5: Information providers will want to keep their customers fully informed about the information they provide to HMRC (and have a responsibility to do so under the Data Protection Act 1998). Do you think there should be a standard approach, or should information providers design the best approach to meet the needs of their particular business and customers?
- Question 6: Do you have any preferences for how you would like to be kept informed by third party information providers?
- Question 7: Do you think there are any additional safeguards we should consider in relation to the protection and use of third party information by HMRC?
- Question 8: Do you agree with the principles we have set out for how information queries should be resolved? What are your expectations for how this would work in practice?
- Question 9: How can we best align HMRC’s third party information requirements with information provider’s circumstances? For example, with other standards information providers need to meet; other regulatory change; internal business processes and requirements.
- Question 10: If you currently provide information to HMRC at year-end what would be the impact of moving to a more frequent in-year process, assuming that HMRC is able to align to your circumstances as described above?
- Question 11: We have given you a high level introduction to the standards necessary to make the exchange of data efficient and dependable. Do third party providers foresee any specific challenges in adopting standards along these lines?
- Question 12: What opportunities do current and potential information providers and software providers see for a stronger partnership with HMRC to enhance our customer experience?
- Question 13: What new sources of third party information would most enhance the customer experience and best contribute to the aim of ending the tax return for all?
- Question 14: How can we best open up discussions and begin to work with new potential information providers who are not currently providing information to HMRC on a regular basis?
What do you think?
Other areas covered by the consultation
This is only one part of the consultation. See summaries of the other areas here.