Posted by Tax Innovations on 16 Nov 2011

Modernising the Personal Tax System

The Government is releasing consultation papers that discuss an overhaul and simplification of the personal tax system.

David Gauke, the Exchequer Secretary set out a Governmental vision for a more open and transparent personal tax system that is easily understandable by all.

Today’s publication ‘ Modernising Administration of the Person Tax System‘ details ideas of how personal taxes can be made more visible to individuals and invites professionals and taxpayers to submit their views on a number of questions about the subjects mentioned below.

David Gauke said of the plans:

At the moment, for a lot of people, the tax line on their pay slip is the only time they see just how much they’re paying in tax, but the Government doesn’t think that’s good enough. We want to make tax more transparent and we want people to be more engaged with their own tax affairs.

Our vision is to transform the customer experience of the personal tax system. The documents published today set the stage for the ideas and innovations that will realise that ambition.”

Individually the publications discuss:

  • Increasing the visibility of how much tax individuals should pay.
  • The integration of tax and NICs and;
  • The introduction of PAYE real time information recording.

Increasing the visibility of how much personal tax individuals should pay

There is much reference throughout the discussions to how other countries administer their tax systems by pre-filling (i.e. details of income/tax deductions are pre-filled from third party information) tax returns and how allowing taxpayers to view their own individual tax accounts has led to a greater public awareness and understanding of tax.
 
Denmark has used a pre-filled tax return system since 1987 and moved to using a “transparent system” in 2003 whereby its taxpayers view their annual pre-filled tax statements online.  The Danish authorities  claim that administering the personal tax system in this transparent way has helped to improve the tax compliance of its citizens, as well as the overall understanding of how tax is calculated.
 
Although the paper only discusses the ideas, there is a strong underlying signal that if the UK were to make the move to tax transparency, the Danish example is the route that the current Government would like to explore first.

The Integration of Tax and NICs

Her Majesty’s Revenue and Customs (HMRC) collects around £250 billion of  combined National Insurance and income tax payments each year and the system costs £1 billion to administer, a relatively inexpensive cost to the Government.
 
The system does, however, rely heavily on employers collecting liabilities on the Government’s behalf and over the years the system has become overly burdensome.
 
The current Con-Dem Government announced during the Budget 2011 that it intended to look at integrating income tax and NICs to remove much of the burden that employers face, to improve transparency and to reduce the annual administration costs and errors.
 
Since the announcement HMRC and HM Treasury have gathered evidence and opinions on the integration and have reported that there is an appetite for reform but that any changes need to be made with sufficient care.
 
The full consultation paper on the integration can be found on the HM Treasury website – ‘Integrating the operation of income tax and National Insurance contributions

The introduction of PAYE real time information recording

In December 2010, the Government announced that it was proceeding with introducing Real Time Information (RTI) recording from April 2013.  RTI will involve automatically collecting information about tax and other deductions each time employers run their payroll as opposed to employers having to submit monthly and yearly reports.

The purpose of RTI is to once again reduce the burden of employment administration and to ensure that taxpayers are paying the right amount of tax at the right time.  Once the system has been successfully rolled out it should go some way to helping business, with employer returns being integrated into payroll software.
 
Although there is likely to be an additional cost for this integration, the time employers save in not having to administer and provide end of year returns should outweigh any software price increases.

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