Digital revolution may not benefit all taxpayers

Published: 7 Apr 2015 09:30

Susie Walker, head of tax at Johnston Carmichael, explains

IN last month’s Budget speech, George Osborne announced the Government will abolish the annual tax return in favour of a new digital tax account.

“By the end of next Parliament, every individual and small business in the UK will have a personalised digital tax account,” – Susie Walker, Johnston Carmichael

“By the end of next Parliament, every individual and small business in the UK will have a personalised digital tax account,” – Susie Walker, Johnston Carmichael

However, while this sounds like a sensible measure for the modern age, it is already causing some confusion amongst individuals and businesses. So what will it actually mean in practice for taxpayers and their agents?

What the Government actually said in the March Budget was that ‘millions of individuals will have the information HMRC needs automatically uploaded into new digital tax accounts. Businesses will feel like they are paying a simple, single business tax – and again, for most, the information needed will be automatically received.’

In the accompanying release entitled ‘Making tax easier: the end of the tax return’ David Gauke MP, Financial Secretary to the Treasury, introduced the developments as a ‘bold vision’ with a foreword explaining that by early 2016, five million small businesses and 10 million individuals across the UK will have access to their own digital tax account. ‘As time goes on’, he continued,’ these personalised digital portals will offer more services, collating information received by HMRC from other sources. By the end of the next Parliament, therefore, every individual and small business in the UK will have a personalised digital tax account’.

That is the official Government perspective on the new digital accounts but how they will work in practice could well be a different matter.

For many with very simple tax affairs this will replace the tax return, saving us all from digging out our P60s to record information which HMRC already holds from our employer. It also means an end to adding up how much interest or dividend income we have received in a year when HMRC also has that information from banks and companies. For anyone with tax affairs beyond the very basic, replacing the current tax return with a different format of return sounds less realistic. They will still require a degree of manual intervention to accurately calculate their tax liabilities. Anyone with choices and decisions to be made around how their tax is computed will always need flexibility and a tax adviser who can keep them on the right side of the law while ensuring the optimal tax position for them. It is therefore unclear whether they will benefit from this digital tax revolution.

The demise of the tax return as we know it certainly isn’t going to happen overnight. What we have seen in the Budget is a public collation of HMRC’s digital plans for modernising and simplifying the UK tax system, which they have been working hard on for a number of years. £200m is set aside to expand HMRC’s digital services over the next three years and we should applaud the investment in this project. The future vision for digitising income tax is to emulate the DVLA which has made it much more simple to renew car tax online, with no further need to produce the MOT and insurance certificate over the counter at a Post Office. By 2020, HMRC envisage businesses being able to feed their HMRC digital tax account via their accounting software and to pay tax as they go. The more we can use IT solutions to remove basic administration the more it will free up time for tax advisers to add value to their clients. This could get messy, though, as accounting profit does not equate to taxable profits other than in the most simple cash based businesses.

It’s important to be clear that the Chancellor’s plans for digital tax returns which were included in the post-Budget headlines, are a longer term development. While the detailed timetable for this change is to be determined, companies and individuals will still be required to complete a traditional tax return. The Government has promised to publish a roadmap later this year and to consult on the changes needed to deliver these ambitious plans. We will monitor these developments with interest as they will provide a much more accurate indication of when the digital revolution will actually commence.

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