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Digitally transparent

15 November 2011 / Mike Truman
Issue: 4330 / Categories: Comment & Analysis , merger , Admin , Income Tax
HMRC have issued two consultations aimed at making tax simpler and easier to understand. MIKE TRUMAN is not convinced


  • Two new consultation documents, one on tax and NI integration, another on tax transparency.
  • Still only integrating ‘operation’ of tax and NI.
  • New online services proposed for taxpayers.

This Monday saw the publication of the expected consultation document on the integration of the operation of PAYE and NIC, which followed an informal call for evidence.

However, in a supermarket-style BOGOF offer, this was combined with the publication of a previously unheralded consultation, Tax transparency for individuals.

Monday is also the day Taxation goes to press; this article is based on advance copies of the documents but was written before the launch itself. It appears that more attention is intended to be given during the launch to the tax transparency document than to the one on PAYE/NIC integration.

The first question to ask is why the two documents were released together. There is an argument that tax transparency is made more possible by the simplification of integrating the operation of PAYE and NIC. To a cynic, there is also a concern that the shiny pretty things in the tax transparency document may serve to blind commentators to the paucity of ambition on PAYE/NIC integration.

So, let’s take a look at the latter one first.

Operation only

A brief recap. The Office of Tax Simplification (OTS) issued a report in March, which called for the integration of tax and NIC.

The response of the government, while positive on other areas of the report, made it clear that only the ‘operation’ of tax and NIC would be considered for integration.

The imposition of NIC on pensioners, or on savings income, was specifically ruled out – as was any abolition of the ‘contributory principle’ (a principle which is best searched for in the current system with a powerful microscope, so significantly has it been eroded).

The next step was a call for evidence before the consultation paper was issued. I did hope that this might be an opportunity for challenging the refusal to consider true integration.

The consultation document now published shows that some of the responses received did indeed do so, but that the door has been firmly shut on the possibility:

‘4.6 The Government recognises that this falls short of the full merger of income tax and NICs called for by, amongst others, the Institute for Fiscal Studies. However, the Government wants to explore whether closer operational integration that retains a separate NICs identity is a worthwhile goal on its own merits.’

What integration?

So what integration in operation does the paper propose? At this stage it is only putting forward ideas for consideration, based on the evidence received, but it understandably suggests that national insurance should be made more like tax, rather than the other way around.

In particular, the following options (which are not mutually exclusive) could be considered for contributions:

  • ‘Annual NICs. Whether assessment for NICs should be based on the tax year as it is for income tax.
  • Cumulative NICs. Whether liability for NICs should be based on earnings over the year-to-date, rather than assessed independently in each pay period.
  • Aggregated NICs. Whether earnings should be considered across employments when determining NICs liability, rather than per each employment.’

The problem of benefits in kind will also be on the agenda; at present the absence of an NI charge for employees on most benefits makes it attractive for employers to provide rewards in this form rather than as salary.

There is also an intention, not fully backed up by proposals, that the operational integration should make it easier for people to understand how their tax and NI contributions have been calculated.

This will be aided by an alignment of thresholds (something which the previous government was on course to do until the debacle of the 10% rate abolition), but it is not easy to see how the level of integration so far proposed will really allow most people to fully understand the calculations.

More consultation

The government defends the proposals as far-reaching in their scope, even though they fall well short of the true integration which would be needed to remove the distortions in favour of operating as self-employed rather than employed, or as a company rather than a sole trader (which, lest we forget, was the swamp we were trying to drain in the first place).

Mindful of the number of people it would affect (and, no doubt, of the aforementioned 10% rate debacle) the timetable for further consultation and eventual implementation is slow. It also illustrates the welcome change to the way that tax consultation is now to be carried out.

Working groups will discuss this initial paper with a view to setting out the high level options by Budget 2012. A further two rounds of consultation will produce firm proposals by Budget 2013.

The legislation will then go through Parliament by 2015, with implementation not expected until 2017, after both government and employers have been able to make the necessary software changes.

In themselves these changes will remove some distortions, and it is fair to say that they are likely to be the most radical transformation of National Insurance for a long time.

But it still seems like an opportunity wasted to me. The one crumb of comfort is that the steps being taken are the ones which the OTS set out as the first on a path that could lead to full integration of tax and NIC in the future.

Perhaps it is unreasonable to expect a government to commit now to a reform which would hang round its neck like an albatross at the next election (‘Tory tax bomb for pensioners’), but if this is the path they choose, they and their partners in the coalition cannot complain when people use incorporation and corporate partners as a way of reducing tax and NIC bills.

Long-standing readers will remember that we have compared this before to the Pavlovian response of Richard Curtis’ dog, Rufus, who salivates on hearing a tin of corned beef being opened.

Taxpayers have a similar reaction on being shown a way to reduce their tax bill, and it is unreasonable not to expect them to take it.

Time, I think, for us to check again on the dog-owning habits of the current Treasury team, to see whether they will have learned this lesson from their canine companions (although an internet search for ‘George Osborne’ and ‘dog’ leads you to Baxter, the dog who likes to eat leaflets bearing the Chancellor of the Exchequer’s photograph, whose exploits are recounted on the wonderfully named blog My Dog Ate George Osborne).

Transparency online

So what of the other tax modernisation document released at the same time? By contrast, it has much more ambitious aims, proposing a system by which taxpayers can check their tax affairs online and be provided with a pre-populated tax statement to check and amend if necessary.

To achieve this, there will need to be a significant investment in new online systems by HMRC: not an area where the government has been particularly successful in the past.

The proposals consciously build on the changes made so far, and those proposed for the immediate future. The introduction of the National Insurance and PAYE Service, the single database of employees and their taxes, makes it possible for employees’ liabilities across several employments or pensions to be tracked.

Real-time information will mean this information will be available earlier, within year. And finally, the proposals claim to build on those to integrate the operation of tax and NIC, although the connection between the two sets of proposals is not clearly spelled out.

Transparency proposals

The proposals, as is common these days, come from analysing the way that other countries operate. In looking at personal online access to tax information, the country concerned was Ireland.

This is important, because Ireland operates a similar PAYE system to that in the UK, aiming to collect the right amount of tax and thus to excuse most people from having to submit a tax return.

The Irish ‘PAYE Anytime’ system allows taxpayers to access (using a PIN) a screen that gives details of their tax payments for current or previous years, to claim repayments or make payments, and to declare additional income or make claims for the equivalent of personal allowances.

Readers may feel this is exactly what our online self-assessment system already provides, but the big change is to extend this access to those who do not have to submit a tax return and who have very little access to HMRC’s view of their tax affairs unless and until a reconciliation is done after the tax year ends.

Then, turning to Denmark, the proposal is that this information would be used both to pre-populate tax returns for those within self assessment, filling in the boxes where HMRC have been given the information by others, and also to provide an online tax statement for those who are outside self-assessment.

In Denmark, the latter reform means 90% of taxpayers have been taken outside self assessment, simply checking the pre-filled statement each year online, and reporting any inconsistencies.

The move to pre-population would be widely welcomed, indeed the absence of it is incomprehensible to most taxpayers.

The move online is a part of the general government and HMRC strategy, which at its best (for example, online self assessment personal tax returns, now the bugs have been ironed out) can provide both cost savings for government and time savings for taxpayers.

However, there must be concern that those who are not online will be left behind, and I have an even greater concern for those who understand computers but who are not good with figures.

The tribunals are currently defending them against the HMRC claim that they should have understood they had an underpayment.

Giving them access to a tax statement online may well help some of those who find their tax affairs difficult to understand, but it does not make the complexities of tax itself any more comprehensible.

Issue: 4330 / Categories: Comment & Analysis , merger , Admin , Income Tax
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