In his last budget before the general election, George Osborne announced the creation of digital tax accounts for individuals and small businesses. The move has generally been seen as spelling the end of the annual paper tax return, but with the complexities involved it’s far from certain that this will be the case.
Under the new plan, the digital tax accounts will be accessible online at any time from and in theory will look similar to an online bank account.
The treasury said the switch to digital would make lives easier for the taxpayers and companies who currently fill in an annual tax return.
However the automation of the tax system won’t be a substitute for the invaluable advice accountants give to clients on their financial affairs.
How it should work
The current self assessment system is described by the Treasury as “complex, costly and time-consuming”. The new system will see taxpayers log into an account and see how their tax is calculated by HM Revenue & Customs. This will be automatically updated throughout the year with information from employers, banks, pension providers and the Department for Work and Pensions.
From a tax collection viewpoint, these new proposal provide taxpayers with more choice when it comes to paying tax. Bank accounts will be linked to the tax account and tax due may be paid via direct debit or installments. This will be seen by many as an improvement over the existing arrangements and ends the prospect of a big tax demand after the end of the year, with firms and individuals providing information on their earnings and revenues in real time.
Next year 5m small businesses and 10m individuals will switch over to their own digital tax account. By May 2017, businesses will be able to register a new company and sign up for taxes in a streamlined process created jointly by HMRC and Companies House. The Treasury expects the switch away from paper returns to be completed by 2020.
However whether the introduction of digital tax returns will actually signal the death of the tax return is still uncertain. Guidance given so far suggests that the taxpayer may retain the right to complete a self-assessment return if they wish and recent comment from many accounting professionals questions whether the system will be able to deal with the complexities of some areas of taxation, where greater interpretation of the numbers is required.
Will it work?
The HMRC’s aim is that by 2020 the new digital accounts will encompass all taxpayers, individual or corporate.
Businesses including the self-employed and landlords will, from April 2018, have to update HMRC every quarter where this activity is their main source of income.
That obligation to report quarterly will also apply where the money is a secondary source of income worth more than £10,000, and the main income is from employment or from a pension.
Behind the scenes, HMRC plans to bring all the information it holds on a taxpayer into one system, including data from employers, banks, building societies and other government departments.
This will eventually lead to the demise of the annual tax return for most taxpayers and so the current system of self-assessment, introduced in 1996 and now largely online, will wither away.
“Self-assessment for individuals and small businesses (including companies) will work through digital tax accounts, so there will be no need for them to send in annual tax returns,” an HMRC spokesman explained.
“Obligations on customers, such as to inform HMRC of taxable income or to provide information relating to that income, will not change where HMRC does not have the data from another source.
“Taxpayers will still have to confirm their information is correct and make sure the right tax is paid,” he added.
But the plans are ambitious to say the least.
According to the Treasury, plans to cut the department’s budget by one-fifth will be offset by its digitisation plans.
However, the Office for Budgetary Responsibility has said Osborne’s “making tax digital” savings remain “highly uncertain”.
Added to this is the fact that the department is currently in the process of migrating from its creaking £10.7bn Aspire IT contract – a move already perceived as extremely risky.