HMRC unaware of Welsh taxpayer numbers ahead of devolved taxes

A report from the National Audit Office (NAO) has stated that identifying the Welsh taxpayer population is the main challenge to HMRC in implementing the Welsh rates of income tax, which come into force from April 2019

To ensure that the right amount of tax is collected from taxpayers and is passed on to the relevant government, it is important that HMRC has correct address information and is aware of the Welsh taxpayer population.

To address this issue, HMRC has set up a taxpayer identification strategy which includes:

  • Identifying all Welsh addresses and compiling a master record of the relevant postcodes of these addresses using Office for National Statistics (ONS) data and mapping information;
  • Cleansing the addresses in existing taxpayer records to ensure that they are in a consistent format to facilitate automated processing of residency; and
  • Comparing both the above data sets and update taxpayer records with the appropriate flag when a Welsh address is identified.

HMRC estimates that there were 1.35 million Welsh taxpayers in 2017-18. This taxpayer identification was due to be completed before the notification letter was set to Welsh taxpayers in November 2018 but HMRC has confirmed that around 10,000 taxpayer records were not cleansed before the notification letter was issued. The tax authority said that when these records have been cleansed, Welsh taxpayers that are identified will receive a tax code letter to notify them of their status.

In 2015/16, when HMRC began to implement Scottish income tax, the tax authority was criticised for its lack of communication and the lateness of notification letters to Scottish residents explaining the changes. The tax authority is using its experience of the implementation of Scottish rates of income tax in 2016/17 to help with the introduction of Welsh rates of income tax in 2019/20. HMRC has included staff who worked on the Scottish implementation on the Welsh project team.

The IT systems needed to administer Welsh rates of income tax have already been set up as part of the Scottish income tax project. The system was deliberately designed to be flexible so it could incorporate future devolution arrangements. Through doing this the complexity, cost and risks of implementing Welsh income tax have been reduced.

From 6 April 2019, people with a main residence in Wales and who pay income tax will pay Welsh rates of income tax set by the Welsh Government.

PAYE individuals resident in Wales will receive a new tax code that begins with ‘C’, including taxpayers whose income is below the tax threshold and those who are self-employed will be asked to note their country of residence on their 2019-20 tax return.

From April, the UK government will reduce the three rates of income tax paid by Welsh taxpayers, in line with the system in Scotland. As a result the basic rate drops from 20% to 10%; the higher rate from 40% to 30%; and the additional rate from 45% to 35%.

The Welsh government is then able to set Welsh rates which will be added to the basic rates. For the tax year 2019-20, the Welsh Government has set the Welsh rates at the same level as in England and Northern Ireland.

In 2017-18 HMRC incurred and recharged to the Welsh government £340,000 in costs on the Welsh income tax project, which the NAO has concluded was accurate and fair.

The NAO’s report: Administration of Welsh Income Tax 2017-18 is here 

Report by Amy Austin

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