The UK government describes its consultation on ‘timely payment’ of tax (published as part of the ‘Tax Day’ material) as ‘early engagement on the opportunities and challenges of bringing payment under income tax self-assessment and corporation tax for small companies closer to the point where the income or profit arises’, with calculation and payment based on real-time data. The Government notes that these are the two most significant examples of delay between the ‘point of taxable income and the point of tax payment’.
The consultation highlights key benefits of timely payment for the taxpayer which include:
where tax is paid closer to the time the income/profit arises, funds are more likely to be available to pay the tax;
the large lump sums at set points in the tax year (e.g. 31 July and 31 January for self-assessment) are avoided; and
paying in more regular instalments helps taxpayers to budget, provides greater certainty over their tax affairs, and reduces the likelihood of any unpleasant surprises including interest and penalties for late payment.
Although paying tax earlier may help some taxpayers plan budgets and cashflow, the consultation notes that calculating a taxpayer’s liability in-year will present challenges, particularly around how to recognise allowances, reliefs and expenses which work on an annual basis. For some businesses, smoothing out variable income and expenses across the year is likely to represent a further challenge, although the consultation notes that this is a problem under the existing income tax self-assessment regime. Although, as the ICAEW points out, ‘it is unhelpful for government and HMRC to try to equate tax bills and electricity bills’.
Jeremy Coker, ATT president, pointed out that ‘a widespread move to more frequent, in-year calculation of income tax and corporation tax is very tricky to achieve’ given that both income tax and corporation tax are charged on a yearly basis and ‘do not naturally lend themselves to more frequent calculation and payment’. As Coker notes, ‘while employees have had tax deducted in real time under PAYE for many years, the position is more complicated for businesses which often have expenses to consider, as well as tax and accounting adjustments ... How the annual nature of income tax and corporation tax could be adjusted to fit a more frequent cycle of calculation and payment needs careful consideration.’
The consultation also acknowledges that more frequent payment would restrict the availability of cashflow to businesses during the year, potentially leading to reduced internal investment and in some cases ability to pay suppliers.
David Barton, partner at RSM, said: ‘One of the more noteworthy issues considered is the potential repeal of the current basis period rules for income tax, so that the taxation of profits of a self-employed person’s trade would be based on the tax year in which the profits arose, rather than the date to which the relevant accounts are drawn up.’
The government also invites views on whether more regular or frequent payment of tax should be extended to capital gains tax, noting that any changes to the timings of payment for corporation tax would naturally also affect chargeable gains for companies.
Tom Evennett, partner at EY, said: ‘This shows that, together with the confirmation that the government will legislate to extend making tax digital to income tax self-assessment from April 2023, the government is aiming to move towards their ambition of near real-time collection of income tax and corporate tax for small companies through a digital tax system. The consultation is initially focused upon income tax and national insurance contributions for self-employed individuals but may in time be extended to cover more timely payment of capital gains tax by individuals too, whereas for small companies this would include CT on total profits (including any capital gains which are subject to corporation tax).’
The call for evidence runs until 13 July 2021. The government has confirmed that no changes will be made before the next general election.
The UK government describes its consultation on ‘timely payment’ of tax (published as part of the ‘Tax Day’ material) as ‘early engagement on the opportunities and challenges of bringing payment under income tax self-assessment and corporation tax for small companies closer to the point where the income or profit arises’, with calculation and payment based on real-time data. The Government notes that these are the two most significant examples of delay between the ‘point of taxable income and the point of tax payment’.
The consultation highlights key benefits of timely payment for the taxpayer which include:
where tax is paid closer to the time the income/profit arises, funds are more likely to be available to pay the tax;
the large lump sums at set points in the tax year (e.g. 31 July and 31 January for self-assessment) are avoided; and
paying in more regular instalments helps taxpayers to budget, provides greater certainty over their tax affairs, and reduces the likelihood of any unpleasant surprises including interest and penalties for late payment.
Although paying tax earlier may help some taxpayers plan budgets and cashflow, the consultation notes that calculating a taxpayer’s liability in-year will present challenges, particularly around how to recognise allowances, reliefs and expenses which work on an annual basis. For some businesses, smoothing out variable income and expenses across the year is likely to represent a further challenge, although the consultation notes that this is a problem under the existing income tax self-assessment regime. Although, as the ICAEW points out, ‘it is unhelpful for government and HMRC to try to equate tax bills and electricity bills’.
Jeremy Coker, ATT president, pointed out that ‘a widespread move to more frequent, in-year calculation of income tax and corporation tax is very tricky to achieve’ given that both income tax and corporation tax are charged on a yearly basis and ‘do not naturally lend themselves to more frequent calculation and payment’. As Coker notes, ‘while employees have had tax deducted in real time under PAYE for many years, the position is more complicated for businesses which often have expenses to consider, as well as tax and accounting adjustments ... How the annual nature of income tax and corporation tax could be adjusted to fit a more frequent cycle of calculation and payment needs careful consideration.’
The consultation also acknowledges that more frequent payment would restrict the availability of cashflow to businesses during the year, potentially leading to reduced internal investment and in some cases ability to pay suppliers.
David Barton, partner at RSM, said: ‘One of the more noteworthy issues considered is the potential repeal of the current basis period rules for income tax, so that the taxation of profits of a self-employed person’s trade would be based on the tax year in which the profits arose, rather than the date to which the relevant accounts are drawn up.’
The government also invites views on whether more regular or frequent payment of tax should be extended to capital gains tax, noting that any changes to the timings of payment for corporation tax would naturally also affect chargeable gains for companies.
Tom Evennett, partner at EY, said: ‘This shows that, together with the confirmation that the government will legislate to extend making tax digital to income tax self-assessment from April 2023, the government is aiming to move towards their ambition of near real-time collection of income tax and corporate tax for small companies through a digital tax system. The consultation is initially focused upon income tax and national insurance contributions for self-employed individuals but may in time be extended to cover more timely payment of capital gains tax by individuals too, whereas for small companies this would include CT on total profits (including any capital gains which are subject to corporation tax).’
The call for evidence runs until 13 July 2021. The government has confirmed that no changes will be made before the next general election.
