The Chancellor, in his final budget statement before the Parliament is dissolved, revealed the phasing out of the annual self-assessment tax return within the next 5 years.
Instead annual tax returns will be replaced by ‘digital tax accounts’ which are designed to bring together each taxpayer’s details in one place, just like an online bank account.
The finer details on how the new system work will be released later in 2015. However, it’s confirmed that by early 2016, 5million small businesses and the first 10million individuals will switch to the new system. It will be universally available to more than 50million individuals and small businesses by 2020.
So what does it mean for individuals and businesses?
To begin with, this will be the biggest ever change to the way you manage and pay your taxes.
- Your struggles with maintaining heaps of invoices, receipts and confusing forms will definitely come to an end as you’ll now have one ‘dashboard’ for all information
- The digital accounts will be simple, secure, personalised to the taxpayer - accessible through a login and password using the digital device of your choice. You will be able to submit tax information, register for new services, update your information and understand quickly and easily what you need to pay without having to go through the trouble of using a phone, letter or paper forms
- You will be able to set up regular direct debits to pay outstanding tax, while basic information such as earnings and pension income will be kept on record to save you the hassle of entering it. However, information such as buy-to-let income and expenses that HMRC does not receive automatically will still need to be entered on the digital account each year
- As part of its drive to automate services, HMRC will start automatically pulling in details of taxpayers who self-assess and those that are paid through PAYE. As a first step, information such as P60 details, end-of-tax-year summary of an employed taxpayer’s income and tax deductions will be pre-populated from late 2015
- Any information HMRC holds about you, along with data like interest from banks, building societies, investment firms and other third parties will be also be pulled into your digital accounts. However, you will still be obliged to verify if that is correct and inform HMRC of any errors. We assume there will be a deadline by which taxpayers will have to do this
- Rather than facing one big bill in January, businesses and individuals will have the option to ‘pay as you go' with the linking of their accounting software and bank accounts to their online tax account with HMRC. In turn, HMRC will make smarter use of the data it holds and do more of the work that taxpayers currently have to do for themselves
Since the new system is going to be rolled out gradually, and not everyone will be able to use digital services, people who still wish to continue filing an annual paper return will be able to do so.
We agree with HMRC that this is a bold vision for a new and modern tax system which will make it easier for all taxpayers to manage their tax affairs. However, the transition to the new system is full of challenges.
For instance:
- How will this tie in with the new penalty system?
- How will it interact with the Universal credit, tax-free childcare and HMRC’s £45m “Connect” system which pulls data from taxpayer records, third parties and the internet?
- What about interaction with the simpler software packages that are typically used by smaller businesses?
HMRC will publish consultations and roadmaps on how it will deliver the changes needed for the new tax system to function. If you are one of the individuals or businesses that gets chosen to switch to the new system by early 2016, it is advised that you plan for your tax liabilities, improve your accounting systems, and get in touch with your tax agents as they should be able to help you with this.
