Individual tax accounts need a revamp, says OTS

The Office of Tax Simplification (OTS) is calling for improvements to HMRC’s individual tax account service to provide an end-to-end tax reporting and payment service for the self employed and buy-to-let landlords

An overhauled individual tax account would merge the present personal and business tax accounts, so that taxpayers could see information about all their different types of income in separate fields, but in one place, and should also be able to receive and display data from taxpayers about their self employment or rental income.

It should also offer a running calculation of the additional tax that the individual may need to pay in relation to the year to date, looking across all the information held in the individual’s tax account.

Another issue which creates problems is the fact that taxpayers can only make payments twice a year. The OTS would like to see a change to the current twice-yearly payment requirements so that taxpayers could choose when they want to pay their taxes, for example on a monthly payment if preferred. The account should also display the amounts paid on a running total basis.

The growth in self employment numbers from 3.3m in 2000 to 4.96m this year (source: ONS) means that there is increasing pressure for improvements to the current tax reporting system, particularly as nearly half of self-employed people complete their own tax return and never use an accountant or tax adviser, according to HMRC figures.

Nearly half (42%) of total respondents to the OTS self-employed survey said that they would find it helpful to be able to make payments throughout the year towards their final tax bill.

OTS said ‘such a system should allow flexibility about the amounts and frequency of payment to help to cater to those with less regular and stable cash flow’.

Victoria Todd, head of the Low Incomes Tax Reform Group (LITRG) team, said: ‘Allowing taxpayers to make ad hoc payments would give far more flexibility as to when they make payments and how much they pay at any one time and some self-employed people may find this helpful...further work [needs to be] done to explore the idea in more detail, including what impact it may have on DWP benefits and how it would work in practice.’

However, progress would be dependent on developments on the personal Making Tax Digital reporting system, which has been delayed until 2021 at the earliest. It was originally expected to be introduced for the self employed and landlords from 2020.

Bill Dodwell, OTS tax director, said: ‘The key recommendation in this report is for HMRC to continue its work on the personal tax account further, to enhance its capabilities and integrate it with the business tax account. This could thus provide an end-to-end reporting and payment service.

‘Previous work from the OTS has established that many self-employed taxpayers want additional help in reporting and paying tax. In some sectors, third-party reporting could help. Further in-depth work is needed to test this and potentially develop a workable plan.

‘Current law provides that self-employed people and landlords pay their tax twice a year. Many are happy with this - but there’s also evidence that others, especially those on middle or lower incomes would like help to stay on top of their tax payments. More work could define how this help could be best provided.’

Although construction work remains the most common occupation for self employed people, professional, scientific and technical occupations make up the second most common type of self-employment.

Currently the self employed and buy-to-let landlords have two accounts, one the individual version as well as a business tax account, making reporting and paying income tax more complex than is necessary.

The growing number of buy-to-let landlords is another area where tax reporting needs simplification, although these people are more likely to use an accountant to complete their returns. There are currently an estimated 1.5m UK landlords, with an estimated 5% operating their property rental businesses through companies.

Landlords, on average, report a gross rental income of £15,000 per year (before tax and other deductions). For most landlords, income from rent makes up two fifths (42%) of their total gross income.

However, there was little enthusiasm for more frequent payment instalments. Only 16% of total respondents to an OTS landlord survey said that they would find it helpful to be able to make payments throughout the year towards their final tax bill. They expressed concerns that more regular payments would be disruptive, particularly if a property was being renovated, for example, and as such was not earning income. Others preferred a flexible approach so they could choose when to make payments during a year.

OTS also warned that any changes to the current system would need careful review to ensure that HMRC’s IT systems were updated to take into account staggered payments.

The OTS report stated: ‘It would be important to ensure that whatever information was reported, or payments made, to HMRC can be matched to the individual or business it relates to and is accessible and visible to the self-employed person through an online individual tax account.

‘This means HMRC would need to have the right systems in place to make this happen. This is not currently the case and will require additional funding to be secured.’  

The current system for staged payments, used by an estimated 58,000 individuals, was described as ‘clunky’ and required a number of steps online before setting up a payment plan, while it was ‘difficult to find guidance on how to set it up’. It is also not open to anyone with arrears.

OTS Tax reporting and payment: Simplifying tax for self-employed people and residential landlords, issued 31 October 2019

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