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HMRC’s digital future – death of the tax return?

Created: November 2016

By 2020, the government plans to introduce a digital tax system for all UK taxpayers.

Called ‘Making Tax Digital’, the proposed plans will have a wide-ranging impact on how businesses and individuals report their taxable income and gains.

HMRC sees this as a shift towards ‘real-time reporting’ and has even hailed the changes as “the end of the tax return”.

So why is the government making these changes and what are the implications of such a comprehensive overhaul for UK taxpayers?

HMRC sees this as a shift towards ‘real-time reporting’ and has even hailed the changes as “the end of the tax return”.

What is ‘Making Tax Digital’ about?

The move towards digital – often called the Fourth Industrial Revolution – has had a wide-ranging impact on all manner of industries.

The government has leapt upon this technological shift as it seeks to streamline how tax is reported in the UK – with the overall aim being a simplified and more holistic way of declaring taxable income for the taxpayer, while driving up levels of compliance through more accurate reporting.

As HMRC sees it, this is a move away from the “needlessly bureaucratic form filling” of old, according to David Gauke, Chief Secretary to the Treasury.

Instead, the government’s goal is for taxpayers to report their transactions and income in ‘real-time’, making the onerous task of filing tax returns at the end of the financial year a thing of the past. In addition, the government intends to end the free provision of software for filing the annual tax return and will require reporting to be made using third party software – thus driving up the cost of compliance.

The government has leapt upon this technological shift as it seeks to streamline how tax is reported in the UK – with the overall aim being a simplified and more holistic way of declaring taxable income for the taxpayer, while driving up levels of compliance through more accurate reporting.

What are the implications of this?

The government’s target for this changeover is 2020, but a few of these changes are already in place. Taxpayers can now open digital personal tax accounts (PTA), to get a real-time view of their tax affairs and see how their tax is calculated.

Over the next four years, UK taxpayers will progressively gain more powers over their tax affairs through their PTAs.

For the self-employed, digitisation will include pre-population of self-assessment with basic earnings and deductions from the last tax year already filled in.

From 2018, it’s also likely that small businesses turning over £10,000 a year – including from self-employment or through Buy-to-Let – will have to update HMRC at least quarterly and possibly pay on account of the eventual tax liability too. ‘Pay as you go’ tax will be voluntary, at least at first.

The government’s target for this changeover is 2020, but a few of these changes are already in place.

While HMRC stress that this is designed to streamline the reporting process and remove the stress of filing a return at the end of January, freelancers and small businesses alike are concerned this will quadruple their tax responsibilities – and therefore increase the financial burden requiring them to seek professional help on multiple occasions – and they will still be required to submit a year end declaration in any event.

There is also a worry that the government’s digitisation overlooks the ‘digitally excluded’ – who account for around 19% of the UK’s self-employed.

HMRC have sought to put provisions in place for this, allowing people to nominate others to submit tax returns on their behalf and to supply information over the phone.

A connected future

Despite some finding cause for concern, the government’s digitisation of tax is seen as a necessary step to increase compliance in the UK.

In this digital age, many people earn taxable income from a growing and diverse range of sources – from online trading to savings interest. HMRC’s plans are to collate these various income sources into one place, and streamline the process of collecting the correct amount of tax.

Tim Walford-Fitzgerald, Principal
T 020 7380 4927
E twfitzgerald@hwfisher.co.uk