HMRC’s Tax Administration and Maintenance Day on November 30 saw a flurry of documents published. Among these was a new call for evidence on reforming the Income Tax Self-Assessment (ITSA) registration rules for self-employment income, property income and partnership or foreign income from trading and property.
Although HMRC’s plans in this area are still at an early stage, any changes are likely to have a significant impact on taxpayers and their advisers.
Why does HMRC think reform is needed?
HMRC are concerned that the current system, under which individuals have until six months from the end of the tax year in which they become liable to income tax to notify HMRC, causes a number of problems.
In particular, tying the notification deadline to the tax year means that there are inconsistencies in the amount of time individuals have before they need to get in touch with HMRC.
Depending on when they start their business, some individuals may have up to 18 months before they need to notify. For example, a sole trader starting in business on April 5 2020 will only have until October 5 2020 to notify HMRC, but someone starting a day later on April 6 2020 will effectively have an extra year, with their deadline being October 5, 2021.
HMRC accept that fledgling businesses have a lot on their plates, and as a result tax can be de-prioritised. There is also a problem with a general lack of awareness – taxpayers may not have a good understanding of their tax obligations, or incorrectly believe that interacting with one arm of government means that HMRC will already know about them.
All of these factors can result in taxpayers either not engaging with HMRC in a timely manner, or never engaging at all.
HMRC believe that this leads to a number of issues, including:
- An increase in the hidden economy
- Poor record-keeping habits
- A payment “pinch point” when taxpayers file their first return
- Lack of awareness of services like HMRC’s Budget Payment Plan which can help with managing cashflow
- A lack of up to date records making economic support difficult to apply – for example, new traders being excluded from the Self-Employment Income Support Scheme (SEISS).
What is being proposed?
The main option proposed by the call for evidence to tackle these issues is bringing forward the point at which the self-employed and landlords are required to identify themselves to HMRC.
One way this could be achieved is to reduce the current deadline of six months from the end of the tax year in which the taxpayer becomes liable to a shorter period of two, three or four months. Whilst this would drive earlier engagement with HMRC, maintaining the link to the tax year would not address the inconsistencies in the amount of time different businesses have to notify HMRC, and could still lead to some individuals not engaging with HMRC for over a year.
An alternative suggested by the call for evidence is therefore to completely remove the link to the tax year and instead require individuals to register for ITSA a specified amount of time after they start to receive trading or property income. This proposal would address the inconsistencies noted above, ensuring everyone had the same time to register. However, it brings its own practical problems.
In particular, it is not always clear when someone has started trading, or when a hobby tips into a trade. It could also result in businesses being brought into ITSA that will never actually turn profitable or end up having a tax charge.
One way to address this could be to make it so that the obligation to register is only triggered on hitting a certain turnover threshold – for example, £1,000 (in line with the property and trading allowances).
Outside of bringing forward the timing of registration, the call for evidence also explores some other potential reforms to raise awareness and make registration more straightforward, including:
- HMRC making better use of third party data to identify those who have recently started in business and make them aware of the need to register
- Leveraging the role of “intermediaries” so that agencies and agents taking on new clients take a more active role in registration
- Software and app providers building tax registration into their products
- Using the Single Customer Account (currently in development) to provide a route to raise awareness and facilitate registration.
The call for evidence closes on February 22, 2021. Comments are invited on experiences of the current registration systems, as well as the potential options for change set out above.
HMRC have indicated that, if the responses they receive show an appetite for reform, they will publish a more detailed consultation in 2022. The earliest implementation date for any change would then be April 2024.