Tax Talk – A Modern Tax System

Tax Talk is a series of articles brought to you by FSL’s own Tax specialist, Alex Ranahan.

On Thursday 19th May I headed to the City Gate offices in Newcastle, where representatives of the HMRC Wealthy team held an open discussion on their wish for quicker and greater engagement with the UK’s wealthy individuals and their agents.  It was an interesting discussion all round and got me thinking about the tax system in general and the changes we could see in the near future, both those announced and those unannounced.

The HMRC reps were keen to emphasise that they know the overwhelming majority of taxpayers – of any category – have no wish to pay the wrong amount of tax.  They also acknowledged the difficulties and delays many tax agents experience when trying to discuss their clients’ affairs with HMRC.  Any process has to allow the compliant taxpayers to sort their affairs out with as few roadblocks as possible, have checks to catch slip-ups, and have safeguards to capture the deliberately non-compliant.

Therefore, they explained, the project at hand was to open up communication channels between HMRC agents and taxpayers’ agents that would run promptly, based on information HMRC received in real time or thereabouts.  If HMRC saw a sudden rush of money appear in a bank account, they could check in with the tax adviser on the nature of the apparent windfall.  Likewise, if the taxpayer were keen to invest their money in a new venture with complex parts, they and/or their agent could book in a chat with HMRC to ensure everyone around the table understood the implications of the transaction and, most importantly of all, of course, agreed on the amount of tax that was at stake.

So this got me thinking about the tax system and how it could change going forward.

The Taxes Management Act governs much of the administration of the UK tax system, from notification (the requirement to notify HMRC that you are now chargeable to Income Tax or Capital Gains Tax if they haven’t already notified you), to how to make a claim for some tax reliefs, filing deadlines for the tax return and amendments, HMRC’s right to enquire into a tax return and the appeals process where a taxpayer disagrees with HMRC on the right tax to pay.

So it’s a pretty important piece of legislation – and it came into force in 1970.  Over fifty years ago.  There have been amendments to the legislation over the years, but the base legal framework remains.

There is consensus in the tax community that there is clear need to seriously modernise the legal framework for the UK tax system, not least the Taxes Management Act 1970 (TMA 1970), and it would be unfair to give readers the impression that HMRC is not already undertaking exactly that.

But what would a modern tax system look like?

In banking, business and shopping, we have seen huge changes in our behaviours in a short space of time.  Most big chain pubs and restaurants allow you to make your entire order using an app on your phone.  Your bank not only knows when and where you’ve been spending your money; some banks even categorise your spending so you can’t hide from the judgemental figure next to ‘Eating Out’.  Smart meters inform your energy provider of your usage down to the minute and suggest your likely future usage and cost.  Fitness trackers that you wear can identify patterns in your exercise and your health – and tell you how to improve both.  Public transport delays and traffic jams are gleaned from both user feedback and concentration of users, updating navigation systems to automatically find the best alternative route (it was reported that the first realisation that Ukraine had been invaded was when a traffic jam appeared near the border on Google Maps).

These are systems which can take in an extraordinary amount of data (well, maybe not the pub order, unless you are having a particularly good Friday night), analyse it for meaningful patterns, and manipulate the results into a user-friendly format.  Furthermore, they use information already known about the user to predict future behaviour:  Would you like to repeat your previous order, or aim for a PB on your normal running route ranked against other local runners?

Yet attempts at progress on the management of our tax affairs have been slower.  Our tax system requires us to use an emergency tax code when we change jobs despite the old and new employers already knowing the day we finish one job and the day we start the next.  Perhaps a good tax system would already know the level of income and tax paid and be able to tell the new employer our tax code from day one.  During the pandemic around one-third of the UK workforce worked from home, and it was widely publicised that the Treasury had relaxed the normal rules to allow anyone who had worked from home for even one day to claim a full year’s tax relief on expenses.  But why did we have to claim it at all?  We knew pretty quickly who was working from home and who wasn’t.  Perhaps a good tax system would apply the tax relief across the board to all those who were eligible, without the need for each taxpayer to make an individual claim.

Information sharing between HMRC and employers, businesses, banks, cross-border and more is only increasing.  The HMRC ‘Connect’ software mines and analyses data drawn from sources such as other government departments, foreign tax departments, as well as external sites in order to track a taxpayer’s affairs.

There is an official HMRC mobile app for your personal tax account – I recommend you create a personal tax account if you have not already done so – and you can track your affairs through the year and make certain claims and submissions.  But much of the data HMRC holds on you is not made available to you – reportedly to ensure unscrupulous parties cannot determine if their fraud has been uncovered – and at that meeting with the Wealthy team the point was made that the ease of access and convenience afforded to the compliant majority appears to be subdued in order to catch the non-compliant minority.

As I say, many changes are already underway:  From large scale reforms like Making Tax Digital, domestic tax base erosion and profit shifting (BEPS) and the OECD standards, through to tweaks like the proposal to allow a taxpayer’s disposals of shares in different portfolios to be pooled separately for CGT purposes.  But we are still a long way off the access and analysis of data that taxpayers themselves could enjoy, combined with the use of that data by Government to automate claims and elections, that is needed for a truly modern tax system.

This blog was submitted on 25 May before I went on holiday.  On the same day Tax Adviser magazine published an article written by Bill Dodwell, the Tax Director of the Office of Tax Simplification, in which he outlined areas in which data reporting and technology could “reduce the burden of tax returns on millions of taxpayers”.  For further reading on this area I do recommend his article, which can be found here.