The Northern Ireland (“NI”) Tax Committee of Chartered Accountants Ireland is pleased to present this discussion paper examining the complexities of tax reporting and payment in the UK. Information about Chartered Accountants Ireland and the Northern Ireland Tax Committee is provided on the previous page.

This paper has been prepared in advance of the joint workshop with the Office of Tax Simplification (“OTS”) discussing UK tax complexity which is being held in November 2019. Tax reporting and payment simplification for the self-employed has been chosen by the OTS as one of its two topics of the four topics for discussion at the workshop.

The comments and recommendations made in this discussion paper are based both on feedback received from members of the NI Tax Committee and the wider membership of Chartered Accountants Ireland.

Background

The number of self-employed individuals in the UK continues to grow on an annual basis. In 2017, 4.8 million people were self-employed, which comprised 15.1 per cent of the UK labour force (12 per cent in 2001), an increase of 45 per cent since 200119.

The latest data20 shows that self-employment in the first calendar quarter of 2019 increased by 90,000 to reach a record high of 4.93 million. Between March 2018 and March 2019, the number of self-employed people increased by 180,000.

According to the Office of National Statistics21, the growth in self-employment is partly explained by changes in technology and the rise of the “gig economy” driven by new technology platforms that make it easier for people to become self-employed.

The Government’s response22 to the Taylor Review of Modern Working Practices and related consultations is currently considering several proposals in this space. This ongoing review is dealing with much broader issues, including tax, which overlap and interact with one another and has implications not just for taxpayers and private sector employers, but for the UK government itself as an employer. It is critical that this review and related work continues and does not stagnate.

Small businesses make up over 99 per cent of the 5.7 million businesses in the UK23. As set out in a recent OTS review24, 75 per cent of these do not employ anyone other than the owner. This therefore means that administrative work on dealing with tax is often disproportionately large in the context of the daily pressure of running a business as it often falls on the owner of the business themselves.

The cost of tax complexity

Tax complexity is made up of different, but inter-connected elements. It begins with the Government’s tax policy making framework and enacted legislation but is also dependent both on how complex that legislation is and how often it changes.

Legislation, who it impacts on and the necessary compliance associated with it must then be communicated to taxpayers and businesses in a way which enables them to both understand it and establish and maintain the necessary processes associated with its compliance. As part of this process it is vitally important that qualified tax professionals are similarly informed and educated.

Where there is a change in legislation (or new legislation is introduced), this, coupled with existing tax compliance obligations, forms part of the cumulative burden of tax compliance experienced by UK taxpayers and their agents.

According to a report from the Federation of Small Business25, the average small business spends £5,000 on tax compliance every year with three working weeks of time spent on tax compliance. According to the World Paying Taxes report for 201926, Ireland continues to be most effective country in the EU in which to pay business taxes and the fourth most effective worldwide. The UK was ranked 23^rd worldwide having fallen from 10^th place in the previous year.

In recent years, UK tax legislation and the related administration necessary to support it has become increasingly complex. Although technology has streamlined the process for reporting and paying tax in certain areas, this remains more complicated than it should be and is in urgent need of simplification. The progress made by HMRC has simply been too slow to harness the full potential of technology to simplify the reporting and payment process. As part of that process, the provision of enhanced online services for agents, representing taxpayers, should also be addressed.

Given the extremely high and continually growing number of self-employed individuals in the UK, the knock-on impact of compliance complexity is widely felt across the UK by businesses, individual taxpayers and tax professionals.

Ultimately, it is the taxpayer who bears the cost of this increased complexity in compliance where they either engage a tax professional to navigate the system for them or, for those that don’t, the time and cost of managing compliance and dealing with any errors made.

Reporting and paying tax

The OTS’ recently published initial report27 in this area sets out three specific recommendations each of which we deal with in more detail in this and later sections of this discussion paper.

Recommendation 1 – the government should invite the OTS to, or HMRC should, explore the potential for HMRC to offer a fully integrated Individual Tax Account, providing an end-to-end tax reporting and payment service, and the key steps and timescales that would be involved.

We agree that the merger of a taxpayer’s personal tax and business tax account into one account is a priority step to be explored in more detail. However, this should be carried out in tandem with the development of enhanced services for agents.

Development of enhanced agent services has been in progress for over eight years now with little to show for it. These enhanced online self-serve services were initially announced many years before Making Tax Digital (“MTD”) as part of the 2011 consultation Establishing the future relationship between the tax agent community and HMRC28 and appear to be being left behind in favour of the development and enhancement of the business and personal tax accounts. This is causing major problems for agents and needs to be addressed urgently.

As part of this review, the OTS should also explore ways to ensure properly appointed agents have access to the information held in tax accounts through their Agent Services Account. This could be set up in such a way that the taxpayer decides what level of access the agent has to this information. For example, access could be set at different levels such as “read only” or “edit”, depending on the wishes of the taxpayer.

Recommendation 2 – the government should invite the OTS to, or HMRC should, explore and identify in more detail:

• the sub-sectors of the economy where third parties play a significant role in relation to a group of taxpayers, in particular where the majority of a taxpayer’s activity can involve third parties who would have sufficient information to support effective reporting;
• the information it would be natural for such third parties to hold and any additional information (such as the National Insurance number) that might need to be gathered to support effective and helpful reporting;
• the extent to which it is usual for such intermediaries to handle money relating to the business; and
• the key steps and timescales that would be involved in requiring them to report such information.

Assuming this would then lead to increased (and effective) pre-population of a taxpayer’s online self-assessment return, this would be welcomed. Again, to be most effective, appointed agents and software providers should also be able to access this data.

In 2016, HMRC conducted a consultation examining ways of Transforming the tax system through the better use of information29. This consultation largely examined proposals, as part of the MTD project, to use further sources of third-party information and make better use of the information HMRC already holds, as part of the self-assessment process.

In recent years, HMRC has been working on improving pre-population, using the existing information it holds. Further improvements are expected to be introduced for the 2019/20 filing season. However, progress on this has been extremely slow and includes a very limited sub-set of the information sources already at HMRC’s disposal.

If the Government acts on any future OTS recommendations in respect of third-party reporting of information to HMRC, this will only be effective if HMRC are able to then use this information on a timely basis and pre-populate returns. A clear, efficient and effective process will also need to be established to allow the taxpayer (or their agent) to resolve any discrepancies in a short time-span.

The sharing of information between third parties and HMRC also inevitably raises data protection, privacy, confidentiality and security issues. The OECD’s 200630 report Using Third Party Information Reports to Assist Taxpayers Meet their Return Filing Obligations describes a number of critical success factors for efficient and effective arrangements (e.g. comprehensive third-party reporting systems, high integrity taxpayer identifiers, compatible legislative framework, and effective use of technology), bearing in mind the objective of providing as many taxpayers as possible with a pre-filled return that is largely complete.

That report also recommends that Revenue bodies contemplating the possible use of pre-populated return arrangements are likely to benefit greatly from a close examination of the experiences of Nordic region countries.

Several other key principles are also highlighted:-

• The need to have a comprehensive base of third-party information, covering both income and deduction items, that must be routinely reported to the revenue body;
• A capacity for this information to be accurately and rapidly reported to revenue bodies and matched, using a system of high integrity taxpayer identifiers, with taxpayers’ records;
• A capability to quickly deal with taxpayers’ adjustments arising with personalised returns;
• Optimal use of technology by information providers, the revenue authority, and taxpayers is central to having highly efficient and effective arrangements in place; and
• A relatively simple legislative framework in place, thus limiting the amount of “adjustment” action required by taxpayers.

Simple assessment

Simple assessment was first introduced by HMRC from September 2017 as a way of removing the need for some taxpayers to complete a self-assessment, where HMRC had the necessary information to issue a complete assessment of their tax liability. To date, no data has been published on the number of simple assessments issue by HMRC, and thus, the number of taxpayer’s removed from self-assessment as a result, since the 2017 launch.

Whilst the premise of this measure is to (simplify and) remove the need for tax reporting entirely for some taxpayers, simple assessment is currently used in a limited number of scenarios. Further progress on simple assessment was also paused in April 2018 following the outcome of the review of HMRC’s work programme which needed reprioritisation due to work on Brexit.

As simple assessment only allows payment of the related tax liability to be done through either the individual’s personal tax account or via a cheque, the inability of an agent to access their client’s personal tax account once again creates problems for the taxpayer and unnecessary complexity.

Online filing exclusions

As set out in more detail in our report on the complexities of income tax legislation in the UK31, UK income tax legislation is so complex that HMRC maintains a list of cases32 where a self-assessment return cannot be filed online. This document alone is 12 pages in length. In these cases, the taxpayer or their agent is required to file a paper return on or before 31st January following the end of the tax year to which the return relates.

These online exclusion cases mean that the taxpayer ultimately will suffer additional costs in meeting their compliance obligations either by completing a paper tax return which, if not correct, leads to under/overpaid tax, interest and penalties or by engaging a tax adviser to do so on their behalf.

This also leads to additional costs for HMRC in processing and checking paper returns and the accompanying calculations for online exclusion cases.

Although a fix has been introduced for a limited number of cases, it is disappointing that the list of online filing exclusions continues to grow on an annual basis.

Making Tax Digital

This topic was covered briefly in our discussion paper on the complexities of income tax legislation in the UK33. We reiterate the concerns expressed within that paper in respect of the introduction of MTD for income tax.

Overall, we are supportive of HMRC’s digital transformation and believe that if the UK tax system is to be both fit for purpose and the 21st century, a “digital” approach should form part of the UK regime, but only where it is proportionate and only for those who are digitally enabled and who initially choose to do so.

Whilst there is no fixed timescale at present within which MTD for income tax will be introduced, it is still intended that this will be mandatory from the outset. The planned exemption limit is still set at turnover of £10,000. This is of particular concern for small and medium businesses. The original concerns within the accounting profession about the speed, scope and proportionality of the proposed changes remain.

In the final recommendation of its report on Tax reporting and payment34, the OTS recommends that “The government should invite the OTS to, or HMRC should, explore in more detail

• which types of self-employment business or rental business would most benefit from being able to report data periodically and pay tax through an integrated Individual Tax Account;
• what data individual taxpayers would need to be able to send to HMRC for this to work effectively (whether through MTD or in other ways); and
• the key steps and timescales that would be involved”

Irrespective of the format of how more regular reports would be submitted to HMRC, the NI Tax Committee’s view is that this type of reporting and paying should not be mandatory. Though the Committee would welcome any move to simplify paying tax, particularly where this also improves transparency for taxpayers, there is an overall concern that voluntary pay as you go of tax will inevitably lead to mandating more regular payments of tax in future. There can be no doubt that this would lead to cash flow difficulties for many businesses particularly given the current economic climate in the context of the UK’s planned exit from the European Union.

Mandated more regular reporting and payments of tax would also result in an increased compliance and administrative burden which would have a more pronounced impact on small businesses.

Claims and elections

According to HMRC35, there are over 500 different claims and elections in the UK tax code. At present, there is no single unified method of making a claim or election with many made as part of the relevant self-assessment and others carried out separately, sometimes using online iForms.

As many of these claims and elections are designed to provide taxpayer’s with a degree of choice which may be in relation to adopting a particular treatment, or the claiming of a relief, exemption or implementing a specific election, it is important that the compliance process which underpins the making of these claims and elections is efficient, simple and supports taxpayer’s rights.

In some specific areas of the tax code, where a relatively simple claim must be made, HMRC’s compliance process can be confusing for taxpayers. A worrying aspect to this is that an online industry has now sprung up around certain areas (including the marriage allowance and relief for employment expenses). Several high-volume repayment agents are now in existence who charge a fee for making these claims. Taxpayers could be exploited, in some cases, into wrongly claiming the allowance or making an overclaim. This could lead to them having to later make a repayment to HMRC in addition to the related exposure to interest and penalties. Alternatively, other taxpayer’s, who are not aware of the process for making a claim (or indeed that they are even able to) may be missing out entirely.

Clearance applications

In cases where UK tax legislation provides for a statutory clearance application, HMRC generally issues its opinion within the requisite 30 days.

However anecdotal evidence suggests that in some cases, where perhaps additional information of clarification is required, this can take longer. The 30-day clock also restarts once the relevant additional information has been provided leading to scenarios where it can take several months to receive HMRC clearance (or refusal to issue clearance).

More recently, in non-statutory clearance applications, HMRC has begun to argue that the uncertainty arising is not from the related tax legislation or guidance but comes from interpretation of the facts of the scenario itself. In some cases, HMRC are not prepared to consider issuing clearance as their view is that there is no uncertainty and therefore the service cannot be used. Inconsistent responses to identical cases have also begun to spring up.

This is not ideal in scenarios where the relevant clearance is required in respect of time sensitive transactions.

In April 201036, HMRC published the outcome of research conducted into the non-statutory business clearance service. At that time, suggested improvements to the application process centred on improved details of what information is required for the application, improved services provided on HMRC’s website and HMRC being easier to contact and able to provide a quicker service.

Though there are no published statistics on the number of non-statutory business clearances made, UK tax legislation has increased in complexity since this research was conducted making this service even more vitally important than ever before.

It is also not clear what specific aspects of the 2010 research were progressed by HMRC. Though detailed guidance is in place setting out how to apply and contact HMRC, the time taken for HMRC to respond can be lengthy and if often in excess of the aimed for 28-day window. The more complex the case, the longer it can take to get a response.

In more difficult cases, the consequences of getting the tax analysis wrong, or disagreeing with HMRC, are much greater. Even in straightforward cases, the process can take up to a month which is of most impact in time sensitive transactions. This can even be off putting for advisers dealing with relatively straight forward cases.

Tax Tribunals

The Tribunals system was created in 2008 as part of a programme, set out in the Tribunals, Courts and Enforcement Act 2007, to rationalise the tribunal system, and has since taken on the functions of over 20 previously existing tribunals. The current system for hearing tax appeals has now been in operation for almost 12 years.

In 2015, the Ministry of Justice consulted on proposals to increase the cost of court and tribunal fees including tax tribunals. These proposals were in the main accepted by the Government in its response37 to that consultation.

The consultation document proposals were expected to generate a cost recovery percentage of around 26 per cent taking fees together across both the First-tier and Upper Tribunals. These increased costs will have been in operation for four years in March 2020. It is not yet clear if these cost savings have materialised and if so, if this has directly benefited applicants, for example by speeding up the Tribunal process or adding additional resource to stretched areas.

The Tribunal system continues to face a significant backlog of cases, as official statistical publications denote. There were 594,000 cases outstanding at the end of March 2019, up 8% compared to the previous year38. The quantum of tax cases being heard also continues to increase annually.

UK devolved regimes

It should be noted that this discussion paper has not examined in detail the additional complexities which arise from the existence of the two devolved income tax regimes in the UK which apply in Scotland and Wales.

As a result, there are now three Revenue authorities within the UK, each with differing responsibilities for tax administration and collection. This has a specific impact on taxpayers and businesses operating in more than one jurisdiction, especially in border areas.

HMRC performance

It would be remiss if this review of reporting and paying tax in the UK did not deal with the taxpayer and tax agent experience of communicating with HMRC as delays in resolving queries by phone or post add to the compliance burden and complicate the process unnecessarily.

The most recent HMRC performance published data39 shows that since April 2019, HMRC has consistently failed to meet its own targets in some key performance indicators (“KPIs”). 36.7 per cent of calls in the tax year to date have taken more than ten minutes to answer (17.4 per cent in the full year to 2018/19). Post cleared within 15 days has fallen to 62 per cent in the year to date (79.4 per cent in the full year to 2018/19). The average speed of answering a call is now over seven minutes compared to just under five in 2018/19.

The Irish experience

Ireland was an early adopter of secure online services for tax and customs administration. The Revenue Online Service (“ROS”), which is now used by tax agents, businesses, individual taxpayers and employees was launched almost 20 years ago in 2000. It was later extended to the PAYE taxpayer base.

ROS enables a taxpayer or agent to view the current position with Revenue for various taxes and levies, register for a range of taxes, obtain tax clearance, file tax returns and forms, and make payments for these taxes online in a variety of ways. Individuals who are only subject to PAYE in Ireland use a similar online service called myAccount.

ROS also contains a secure online system through which taxpayers and tax agents can send enquiries to the Revenue Commissioners. The ROS system also facilitates the making of claims and reliefs available within the Irish tax system. For example, taxpayers can claim personal tax credits, reliefs and exemptions through ROS. ROS is updated three times a year and also has calculation tools and a receipts tracker for maintaining e-receipts.

Though not without its issues40, ROS is viewed by many as a pioneering and successful41 system for tax administration. The unique feature of ROS is that it is provides one single user interface which is available to both the taxpayer and their agent. Ireland also operates, for the majority of taxpayers, with a single taxpayer reference for all taxes for which the taxpayer is registered. In the UK, a taxpayer can have multiple reference/registration numbers.

Executive summary and recommendations

The analysis in this paper clearly signposts the high level of complexity experienced by self-employed taxpayers and agents in the context of reporting and paying tax in the UK. We therefore look forward to engaging in further discussion on this matter and recommend that the UK Government gives the recommendations in the initial OTS review42 serious consideration. In respect of each of the three recommendations in its initial report, this work should be undertaken by the OTS, in its capacity as the independent adviser to government on simplifying the UK tax system.

We also recommend the following:-

• The OTS be tasked with undertaking a more in-depth review of reporting and paying tax, across all taxes, which should also address the potential to broaden the use of simple assessment and the increasing prevalence of online filing exclusions.

Other jurisdictions may also have themes and experiences which could usefully contribute to simplifying reporting and paying tax in the UK. In recent years, the New Zealand tax system has undergone a simplification process with changes continuing to be introduced in 2019.

• The OTS should be tasked with undertaking a review of the system for making claims and elections in the UK;
• The OTS should be tasked with undertaking a review of statutory and non-statutory clearances to identify improvements and simplifications which present an opportunity to reduce the compliance burden;
• The Ministry of Justice should be tasked with conducting a post-implementation impact assessment of the increased Tribunal fees introduced in 2016;
• The Ministry of Justice, assisted by the OTS, should carry out a review of the Tax Tribunals system in the UK focused on simplifications and the user experience; and
• The National Audit Office (“NAO”) should be tasked with conducting an independent review of HMRC performance with a view to establishing both independent KPIs and recommendations for improvements. The NAO should report quarterly on those KPIs and annually to Parliament. HMRC should continue to publish performance data on a monthly basis and this should be published within a maximum of 28 days of each month end.

Tax simplification at the point of contact with HMRC is even more important in the context of Brexit. It is critical that the UK Government tasks the OTS with a continuing agenda of tax simplification with a specific focus on reducing the cumulative tax compliance cost for small businesses and the self-employed. Small businesses are at the heart of the UK economy. They need and deserve a tax system that supports their growth and productivity ambitions.

Freedom of Information

We note the scope of the Freedom of Information Act with regards to this discussion paper. We have no difficulty with this discussion paper being published or disclosed in accordance with the access to information regimes. This discussion paper will be published on our own website in due course and will be available to all our members and the general public.

Source: Chartered Accountants Ireland www.charteredaccountants.ie

19 Trends in self-employment, Office for National Statistics, February 2018

20 Labour market economic commentary, Office for National Statistics, May 2019

21 Labour market economic commentary, Office for National Statistics, May 2019

22 Good Work, HM Government, February 2018

23 Simplifying everyday tax for smaller businesses: a further business lifecycle review, The Office of Tax Simplification, May 2019

24 Simplifying everyday tax for smaller businesses: a further business lifecycle review, The Office of Tax Simplification, May 2019

25 Taxing Times: routes to reform for small businesses as taxpayers, The Federation of Small Businesses, February 2018

26 Paying Taxes 2019, PwC and the World Bank Group, November 2018

27 Tax reporting and payment: Simplifying tax for self-employed people and residential landlords, The OTS, October 2019

28 Establishing the future relationship between the tax agent community and HMRC, HMRC, May 2011

29 Transforming the tax system through the better use of information, HMRC, August 2016

30 Using Third Party Information Reports to Assist Taxpayers Meet their Return Filing Obligations, The OECD, March 2006

31 Complexity of income tax legislation in the UK, Chartered Accountants Ireland, November 2019

32 Self Assessment Individual Exclusions for online filing – 2018/19, HMRC

33 Complexity of income tax legislation in the UK, Chartered Accountants Ireland, November 2019

34 Tax reporting and payment: Simplifying tax for self-employed people and residential landlords, The Office of Tax Simplification, October 2019

35 Self assessment: the legal framework manual, HMRC

36 The non-statutory business clearance service research report 97, HMRC, August 2010

37 Court and Tribunal Fees: The Government response to consultation on further fee proposals, Ministry of Justice, December 2015

38 Tribunal Statistics Quarterly – January to March 2019 (Provisional), Ministry of Justice, June 2019

39 HMRC monthly performance update, HMRC, November 2019

40 Pay and file income tax deadline, Chartered Accountants Tax News, Chartered Accountants Ireland, 18 November 2019

41 e-Government in the Irish Revenue: The Revenue On-Line Service (ROS) – a success story?, National University of Ireland, September 2015

42 Tax reporting and payment: Simplifying tax for self-employed people and residential landlords, The OTS, October 2019