HMRC’s ambitious programme ‘making tax digital for individuals’ (MTDfI) creates both challenges and opportunities, writes Paul Aplin (AC Mole & Sons).
By April 2016, every individual taxpayer will have access to a personal digital tax account. Initially, this will be pre-populated with information HMRC already holds via RTI (employment income and occupational pension information) and state pension details. Other taxable state benefits will presumably be added over time. Interest reported by banks and building societies will be included in tax codes. HMRC will consult this spring to establish what further information could be captured, in order to reach its goal of reducing the number of tax returns from the current 10.2 million to nil by 2020.
This is an ambitious goal, but pre-population is not a new idea: several overseas tax administrations have been doing it for years. Denmark, for example, began pre-populating returns as long ago as 1988. Iceland, Norway, Sweden and Finland, as well as Estonia, Chile and Spain, have also moved to a system where personal tax returns are partly or largely pre-populated. Several lessons can be drawn from their experience.
First, there must be a unique, high integrity taxpayer identifier to ensure that information from payers of income is associated with the right individual and that when passed to the revenue authority, it is allocated to that person’s account. Clean, accurate data must be at the heart of the system.
Second, information must be passed to the revenue authority speedily. In both Denmark and Sweden, information is provided within a few weeks of the financial year end. The use of sanctions for the late submission of payment data varies across the Nordic countries. Some impose penalties, whereas others believe that the reputational risk of failure to supply information is sufficient to encourage compliance.
The common experience is that adequate resources must be made available to encourage and support those supplying data, to enable the rapid and accurate processing of information and to engage taxpayers. A key principle is that information is being used to help taxpayers make a correct declaration, rather than to challenge them. HMRC will need to decide whether deemed acceptance of figures or positive affirmation of correctness will constitute a valid ‘declaration’ and also consider what constitutes reasonable care.
One final lesson may perhaps have already contributed to the thinking behind some recent UK policy developments: the less there is to be declared, the more effective the system is. Was this perhaps a contributory factor in the decision to create the £5,000 nil rate band for dividends and the £1,000 (or £500) savings income exemption? Either way, these measures will help to significantly reduce the number of people in the system at a stroke. Other policy changes might be possible to both simplify the system and to remove even more people from it for little or no loss of tax revenue.
To remove all taxpayers from the annual chore, however, HMRC will have to look at capturing information from stockbrokers and others paying dividends and interest (including private companies), as well as capital gains and – ultimately – foreign sources. Pre-populating personal tax accounts for more complex taxpayers will be challenging.
Hopefully, HMRC will already be looking at the Nordic experience to inform the design of MTDfI and supplement the research it recently commissioned on pre-population from Exeter University’s Tax Administration Research Centre.
HMRC is arguably beginning this exercise with a more complex tax system and administration infrastructure than some of the Nordic countries. Its vision of no tax returns by 2020 is radical, but pre-populating return data has been successfully implemented elsewhere and the potential opportunities for simplification are tantalising.
HMRC’s ambitious programme ‘making tax digital for individuals’ (MTDfI) creates both challenges and opportunities, writes Paul Aplin (AC Mole & Sons).
By April 2016, every individual taxpayer will have access to a personal digital tax account. Initially, this will be pre-populated with information HMRC already holds via RTI (employment income and occupational pension information) and state pension details. Other taxable state benefits will presumably be added over time. Interest reported by banks and building societies will be included in tax codes. HMRC will consult this spring to establish what further information could be captured, in order to reach its goal of reducing the number of tax returns from the current 10.2 million to nil by 2020.
This is an ambitious goal, but pre-population is not a new idea: several overseas tax administrations have been doing it for years. Denmark, for example, began pre-populating returns as long ago as 1988. Iceland, Norway, Sweden and Finland, as well as Estonia, Chile and Spain, have also moved to a system where personal tax returns are partly or largely pre-populated. Several lessons can be drawn from their experience.
First, there must be a unique, high integrity taxpayer identifier to ensure that information from payers of income is associated with the right individual and that when passed to the revenue authority, it is allocated to that person’s account. Clean, accurate data must be at the heart of the system.
Second, information must be passed to the revenue authority speedily. In both Denmark and Sweden, information is provided within a few weeks of the financial year end. The use of sanctions for the late submission of payment data varies across the Nordic countries. Some impose penalties, whereas others believe that the reputational risk of failure to supply information is sufficient to encourage compliance.
The common experience is that adequate resources must be made available to encourage and support those supplying data, to enable the rapid and accurate processing of information and to engage taxpayers. A key principle is that information is being used to help taxpayers make a correct declaration, rather than to challenge them. HMRC will need to decide whether deemed acceptance of figures or positive affirmation of correctness will constitute a valid ‘declaration’ and also consider what constitutes reasonable care.
One final lesson may perhaps have already contributed to the thinking behind some recent UK policy developments: the less there is to be declared, the more effective the system is. Was this perhaps a contributory factor in the decision to create the £5,000 nil rate band for dividends and the £1,000 (or £500) savings income exemption? Either way, these measures will help to significantly reduce the number of people in the system at a stroke. Other policy changes might be possible to both simplify the system and to remove even more people from it for little or no loss of tax revenue.
To remove all taxpayers from the annual chore, however, HMRC will have to look at capturing information from stockbrokers and others paying dividends and interest (including private companies), as well as capital gains and – ultimately – foreign sources. Pre-populating personal tax accounts for more complex taxpayers will be challenging.
Hopefully, HMRC will already be looking at the Nordic experience to inform the design of MTDfI and supplement the research it recently commissioned on pre-population from Exeter University’s Tax Administration Research Centre.
HMRC is arguably beginning this exercise with a more complex tax system and administration infrastructure than some of the Nordic countries. Its vision of no tax returns by 2020 is radical, but pre-populating return data has been successfully implemented elsewhere and the potential opportunities for simplification are tantalising.
