As part of the government’s 10-year strategy to modernise the tax administration system, it is considering whether to change current tax payment timings in a move to more frequent, in-year tax calculation and payment
The government admits that more frequent reporting, calculation and payment could increase administrative burdens on businesses and will carefully consider how to mitigate these.
It focuses on income tax self assessment and corporation tax for companies outside the quarterly instalment regime.
The 11.5 million taxpayers in the income tax self assessment regime are required to report and pay any tax and NICs dealt with in that regime by 31 January following the end of the tax year in question (10 months after the tax year end on 5 April).
Any changes to the current annual payment deadline would primarily affect smaller businesses. The document also seeks to explore options for more timely payment of corporation tax by companies outside of the Quarterly Instalment Payments (QIPs) regime (broadly those with profits below £1.5m).
The government is considering plans to increase the frequency and accelerate the timing of calculation and payment of income tax outside of existing regular payment regimes such as PAYE, and of corporation tax self assessment for companies outside of QIPs requirements.
The HMRC consultation document stated: ‘Calculating and paying based on in-year information could provide taxpayers with greater certainty about their tax liability and, by spreading out the payments, could help taxpayers better manage their tax affairs, reducing the risk that they would be faced with an unexpectedly large tax bill at the end of the payment dates.’
The government is considering two options, either quarterly or monthly payments of corporation tax, and has also noted that annual allowances would have to be considered as part of any reforms. These are normally calculated at year end which would raise complications when the aim is to simplify the current regime.
From April 2023, Making Tax Digital will be extended to income tax for businesses and landlords with income over £10,000. Those within scope will be required to keep digital records and make quarterly reports of income and expenses (by one month after the end of each quarterly period).
This call for evidence will be of interest to everyone paying income tax and National Insurance contributions outside existing regular payment regimes (such as PAYE) and those in corporation tax self assessment who are not within the quarterly instalment payment regime.
Tom Evennett, private partner at EY said: ‘This shows that, together with the confirmation that the government will legislate to extend Making Tax Digital to Income Tax Self Assessment from April 2023, the government is aiming to move towards their ambition of near real-time collection of income tax and corporate tax for small companies through a digital tax system.
‘The consultation is initially focused upon income tax and national insurance contributions for self-employed individuals but may in time be extended to cover more timely payment of capital gains tax by individuals too, whereas for small companies this would include CT on total profits (including any capital gains which are subject to corporation tax).’
Glenn Collins, head of policy at ACCA added: ‘It’s important that the tail doesn’t wag the dog when it comes to tax for small businesses. These SMEs will be vital to the UK’s economic recovery and while data is vital for the running of their businesses they can’t afford to be tied up with complex quarterly tasks solely for tax purposes, so we hope the government will keep it as simple as possible.’
A system where tax is collected in-year will need to include a process for taxpayers to report their expenses in-year to avoid distorting cashflow further by only allowing those expenses at the year end. However, there is a trade-off between how accurate the calculations need to be, and the effort required to provide regular updates.
ATT president Jeremy Coker said: ‘The call for evidence suggests that the quarterly update information submitted by taxpayers under Making Tax Digital might be used to enable more regular calculation and payment of income tax and corporation tax. We remain concerned that quarterly updates are unlikely to give much of an indicator as to a taxpayer’s eventual tax liability because they will not take into account necessary tax and accounting adjustments.
‘How the annual nature of income tax and corporation tax could be adjusted to fit a more frequent cycle of calculation and payment needs careful consideration. We welcome the early engagement of HMRC on this issue, and the commitment in the call for evidence not to make significant changes to the timing of income tax or corporation tax payments within the present parliament.’
The consultation closes for comment on 13 July 2021.