There were many interesting developments in the Budget, as would be expected given it’s probably the best opportunity for electioneering there is. One big change to be introduced, which was initially leaked but has now been confirmed, is the abolition of paper tax returns in favour of an online tax account.
The government has been suggesting a simplification of the tax system for a long time and this is clearly a concept which is similar to RTI, which was introduced to simplify the payroll system.
George Osborne was clearly pleased with the development, referring to it as a “revolutionary simplification of tax collection”. It will certainly simplify things for HMRC; instead of having to wade through millions of tax returns they can digitally combine data from taxpayers into a single programme.
The so-called “digital tax accounts” should be a positive development for many business owners and sole traders when they come into effect by 2020, as they will hopefully provide flexibility. Significantly, from HMRC’s point of view, rather than an annual 31 January return deadline and payment date as is currently the case, this system could be used to enable tax submissions and payments throughout the year, or on any specific date, providing maximum flexibility to HMRC in establishing tax collection dates in the future.
Digital tax accounts should also help improve transparency by breaking down individual tax calculations and automatically updating new information from pension data and employer returns from RTI. By early 2016, we are told that around five million small businesses and ten million individuals will be using the new system.
Having to pay a lump sum of personal tax on 31 January, just after the expense of Christmas has never been popular, so this could be used to help taxpayers plan for their liabilities and improve cash flow for many people. For this reason, from HMRC’s viewpoint, it will potentially help alleviate the temptation for taxpayers to under declare income levels.
The system will also bring the tax system right up to date, enabling taxpayers to file their tax accounts online, probably using a system similar to the current VAT payment gateway, where each individual is provided with a unique login and password.
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For most business owners, VAT return filing is integrated with their accounting software, and it is likely that more taxpayers will adopt a similar approach for their personal digital tax return. For example, personal editions of cloud based software like Sage or Xero may become more widely used for filing regular returns automatically.
Owner-managed businesses may also be able to link their own business accounting software and their bank account to the digital tax account, removing the need to submit an end-of-year return and pay an annual tax bill in one go. By 2020, systems should have evolved to a greater extent, enabling businesses to consolidate business and personal records where appropriate and link accounting software to their digital tax account, so they can feed information in directly.
Maintaining records like this should improve record keeping, because taxpayers will be required to submit returns more frequently – quarterly perhaps? This will inevitably make it easier for HMRC to investigate individual taxpayers and spot reporting anomalies. Most significantly, the government is proposing the system will operate by linking a taxpayer’s bank account to the digital tax account; so presumably it will also make it much easier for them to automatically withdraw funds for taxes deemed to be outstanding, now they have enhanced powers. Watch out for a backlash against the introduction of stealth powers!
Lesley Stalker is a tax partner at RJP.
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