The Northern Ireland Tax Committee of Chartered Accountants Ireland is pleased to have the opportunity to comment on “Call for evidence: timely payment”, which was launched on 23 March 2021. Information about Chartered Accountants Ireland and the Northern Ireland Tax Committee is provided on the previous page.

The Institute and this Committee both recognise the importance of this Call for evidence and, as such, has sought feedback from our wide membership base in compiling this submission. We would therefore be happy to discuss any aspect of this submission and participate in any further consultations/initiatives in this area as this project develops.

The case for change

In December 2017, HM Treasury published “The new Budget timetable and the tax policy making process”, which reaffirmed the UK Government’s commitment to the principles set out in “Tax policy making: a new approach”, published in 2010.

The 2010 principles set out clearly that when embarking on significant areas of reform, such as the current Call for evidence, the UK Government should begin by setting out its policy objectives, including the case for change.

Although this Call for evidence is intended to “open the dialogue on potential impacts and opportunities and no decisions have been made on changes to payment timings”, the case to do so and thus the apparent move away from voluntary more regular payments, which had previously been explored in the 2016 consultation “Making Tax Digital: voluntary pay as you go”, has not been established.

What we also find interesting is that the Call for evidence is badged as the start of “an open, collaborative and transparent conversation” yet it is some 52 pages in length and in Chapter 4 contains details of potential methods of moving to more regular payment on a mandatory basis and the opportunities and challenges specific to those options. In addition, it goes much further than the beginning of a conversation in this area and even seeks views on the potential for timely payment in relation to other taxes and not just income tax (“ITSA”) and corporation tax (“CT”).

The case for change aspect of any major policy change is vital. The Government, therefore, needs to be more explicit in setting out, not just its objectives, but the case for change clearly in respect of this Call for evidence and at a much stage earlier in the process.

At its highest-level forum with the Professional Bodies in the UK, the Representative Body Steering Group has a process of “horizon scanning” as part of its revised Terms of Reference adopted in 2020. This is essentially a forward look at upcoming changes and issues that will affect taxpayers, businesses, agents and software providers. It would have been useful if this “horizon scanning” could have discussed, in advance of this Call for evidence being launched in March, the case for moving away from voluntary more regular payments to opening the dialogue on mandatory real time tax payments.

In addition, as many businesses have only recently reopened again for the first time since December 2020, the key principles of the UK Government’s approach to tax policymaking of predictability, stability and certainty become even more vital as the UK seeks economic recovery and growth over the coming years.

This submission does not provide feedback on the specific questions on page 38 of the Call for evidence for the reason that we believe the Call for evidence has not been started at the right point nor that a case for change has been established.

Our submission takes a step back and looks at timely payment along more general themes, including the need to firmly establish a case for change based on up to date and current evidence. It is our view that the case for change, which should necessarily begin by exploring the appetite for voluntary payments, is the right point to start the conversation at and not by examining potential methods which would, from the outset, mandatorily require more frequent payments.

We note from page 2 of the Call for evidence that “HMRC officials have spoken with stakeholder groups over summer/autumn 2020 to seek views on the key issues to be addressed.” No further information has been provided in respect of these discussions hence we would welcome clarification in respect of who the discussions took place with, what was discussed and the views of those stakeholders.

The lack of transparency around this particular workstream is disappointing given HMRC’s recognition in the Call for evidence that more timely payment would be a major change. We would go further than that and would see a mandatory real time tax payments regime as being a seismic departure from the current practice of how payments of ITSA and CT are currently made under the UK’s Self-Assessment regimes for each of these taxes.

Each of the current Self-Assessment payment regimes will have been in operation in the UK for over a quarter of a century at the earliest point any potential move to mandatory payments of these taxes would be introduced (mooted in the Call for evidence to be no earlier than after the end of the current parliament) in approximately three and a half years’ time.

As a Professional Body representing almost 5,000 members in Northern Ireland, two thirds of whom are working in the businesses which these changes would impact most on, it would have been helpful to have been included in the initial discussions on more timely payment which took place in 2020.

The Call for evidence makes clear that any mandatory move to more regular payments of tax would not begin to take effect until after the end of the current parliament. Although this would be both much too early and should begin by exploring the potential for voluntary more regular payments, for the reasons set out throughout this submission, the timescale for making any changes does afford HMRC with the opportunity to further widen the initial discussions held last year to include the views of taxpayers and businesses from every corner of the UK.

In its December 2019 manifesto, the Government promised, “We will keep costs down for small businesses”. However these proposals will achieve the opposite and will almost certainly increase the costs of both individual taxpayers and SMEs in particular.

Overall, this Institute and the NI Tax Committee does not believe that the UK Government has established a case to even begin to consider requiring millions of individual taxpayers and small businesses to mandatorily make real time tax payments.

Lack of supporting evidence

Chapter 2 of the Call for evidence cites a number of sources of evidence, which, in HMRC’s view, are in support of more timely payment of tax.

None of the sources cited discussed mandation of more regular payments with the taxpayers and businesses who participated. The evidence presented in Chapter 2 was also often out of date with research cited from as far back as 2011 (“Loss evasion and tax aversion”, “Working Papers in Economics 518, University of Gothenburg, Department of Economics ).

For example, the research report “Understanding the impact of taxation cycles on business experience and compliance behaviour of SMEs” was published in March 2015, over six years ago. Although the key findings of this research reports sets out important implications and communications relevant to more frequent reporting and payments of tax, this research was not conducted on the basis that more frequent payment would be mandatory. The research was also conducted with a very small sample of only 40 SMEs and not a wider spread of the UK’s diverse taxpayer and business population.

The October 2019 report of the Office of Tax Simplification (“OTS”), “Tax Reporting & Payment: Simplifying tax for self-employed people and landlords” is also cited in Chapter 2 as is research by Ipsos Mori “Supporting customers to pay their tax on time” from August 2018.

The OTS report is stated as having “found that many of the self-employed, particularly those with lower incomes, would welcome paying tax more regularly, in order to help them budget and to prevent surprise bills” whilst the Ipsos Mori research found that “those who had been in debt had a strong preference for paying tax in instalments in order to help budgeting and to give them a greater sense of control over their tax affairs”.

However neither of those sources specifically discussed mandation of more frequent payments of tax and the potential to link these with quarterly MTD reporting nor did either of these sources specifically conduct any research with businesses within the CT regime.

As set out earlier, HMRC needs to have wider conversations with businesses and should conduct and commission more up to date research, specifically on more regular payments (starting with voluntary, but seeking initial views on mandatory for comparison purposes), which is reflective of both a greater pool of businesses and the current UK business environment.

Chapter 2 also looks at international comparators. Although this is useful, none can be said to be a direct comparison with the UK tax system, in particular given the level of deepening complexity in UK tax legislation. Underlying simplification of the UK’s tax rules, which would make it easier for taxpayers to understand their tax liability, needs to be considered and implemented first before further digitisation and any potential changes to the timing of tax payments begins.

The UK tax system is very unique in many respects, particularly in its complexity, and this aspect has specifically been recognised by the UK Government as being a particular challenge and was the basis for establishing the OTS in 2010 as the independent adviser to the UK Government on simplification of the UK tax system.

A brief case study is included in Chapter 2 in respect of France, which moved to closer to real time payment of tax for both employees and the self-employed in 2019. The benefit of this particular case study is of limited value in the conversation on moving to more frequent payments in the UK unless anecdotal and up to date evidence of this change can be presented.

Finally, Chapter 2 of the Call for evidence sets out that “ITSA and CT make up approximately 34% of all outstanding debts to HMRC” with a possible reduction in tax debt being cited as one of the other potential benefits of moving to more frequent payment of tax.

Not only is the 34 per cent cited in the Call for evidence the average figure for April 2018, March 2019, and March 2020 but ITSA tax and CT receipts together comprised at least 46 per cent of overall tax receipts in 2020/21. This would suggest that ITSA and CT debt is lower on a proportionate basis than one might expect as a percentage of outstanding tax debt when compared to other taxes.

OECD discussion paper

We note also that the OECD Forum on Tax Administration’s discussion paper “Tax Administration 3.0: The Digital Transformation of Tax Administration”, published in December 2020, features in the Call for evidence.

This sets out a utopian vision “where tax administration processes will be increasingly real-time or close to real-time in order to stay synchronized with daily life and business transactions and events”. It also outlines how “integrating more frequent payment into taxpayer systems and business cycles, alongside other advances such as real-time reporting and greater use of third party data, is a key enabler of ‘tax just happening’” and will help unlock a wide range of taxpayer “benefits as well as facilitating a more transparent relationship between taxpayer and tax authority”.

The inclusion of only these excerpts from the discussion paper in the Call for evidence is a very limited view of the context and content of this OECD discussion paper. This clearly sets out on page 3 that the intention in the discussion paper is not “to suggest that this is the only possible outcome nor that tax administration will become completely automated in the future”.

In addition, the report recognises “that each tax administration will have its own different starting point and different set of priorities. The intention is rather to stimulate a debate as to how the OECD might best work collectively, within and beyond tax administrations, on the building blocks of a new way of administering tax, more closely aligned with taxpayers’ natural systems”.

Page 46 of the discussion paper sets out the journey to Tax Administration 3.0. This represents a useful roadmap which the UK Government should use in its own tax administration journey as part of its 10 year strategy, published in July 2020, to ensure it establishes each of the different building blocks required before moving to the next stage. Each stage and new system introduced in the UK should be found to be working well, simple for taxpayers to use and not disproportionately administratively cumbersome nor costly before moving on to the next.

The discussion paper also refers to Tax Administration 1.0 and 2.0 as being the precursors to stage 3.0. In examining the UK tax system in the context of these, it is clear that the UK is not yet fully at stage 2.0. In addition, there have been many difficulties experienced by taxpayers with several of the new online systems introduced by HMRC over the course of the last few years such as those experienced in respect of the Trust Registration Service (which has had a further delay in rolling out its next stage in 2021) and the ongoing issues being experienced by taxpayers in the context of the online system for reporting and paying Capital Gains Tax within 30 days for disposals of UK residential property.

It is difficult to see therefore how a move can be made to 3.0, and especially a mandatory real time tax payments regime, before 2.0 is fully achieved and is working well. Once 2.0 has been fully realised, which should also include more developed online services for agents, only then should the move to 3.0 begin, with the final stage then being the potential for voluntary more regular payments of tax.

Mandation of timely payments of taxes

Our response to the 2016 consultation “Making Tax Digital: voluntary pay as you go” is available on our website. The current call for evidence, although not explicitly stated, has moved away from exploring the possibility of introducing more regular payments of tax voluntarily for businesses within Making Tax Digital (“MTD”) to examine potential methods of more frequent payment of ITSA and CT for businesses, both within and outside MTD, which would not be voluntary, and would be mandatory.

This is at odds with HMRC’s response in January 2017 to the aforementioned voluntary pay as you go consultation which stated that “In light of the responses received we will be looking at the opportunity to build into our systems and messaging some functionality that compares in-year tax calculations with the payments on account due, to help customers decide whether to make a claim for reduced payments on account, or to make a voluntary payment towards a perceived shortfall.”

It is not clear to us what has changed since then and why the conversation around more timely payment has not been picked up again by the current Call for evidence at the point where it left off but instead is examining potential methods which would be introduced not just on a mandatory basis but for a wider group of taxpayers and businesses and not just those within MTD.

It is our view that the economic situation and prospects for many businesses and taxpayers in the UK is so perilous, unstable and uncertain for the reasons we examine in more detail later under the section on cash flow, that any examination in the coming years of more regular payments of tax should first pick up where it previously left off by exploring options on a voluntary basis and solely, at least to begin with, for those within the auspices of MTD.

As set out in the Call for evidence, a facility to make voluntary payments in-year already exists via the Budget Payment Plan. The announcement in the March 2021 Budget of investment in HMRC’s systems to improve this should be used as a starting point to explore the appetite for businesses making more regular voluntary payments of tax in future.

Cash flow

The difficulties faced by the newly self-employed in having to pay all of the tax and NIC liability of their first tax year of self-employment plus the first payment on account for their second tax year is specifically highlighted as a problem area in the Call for evidence. Where a large one-off lump sum tax payment is required, there is no doubt that this can be a difficulty for some of the newly self-employed.

However this is an initial difficulty only for the first tax year of self-employment and does not therefore make mandatory real time payments the right solution. The likely scale of costs and challenges which would arise from mandatory real time payments, which would also result in an increased cost for their agent (which may or may not be recoverable from their client), is not justifiable, particularly where the only benefit from a cash flow perspective would ensue to the Exchequer.

The cashflow benefit of current tax payment arrangements can also be the difference between success and failure for many start-ups who will often already be making PAYE and/or VAT payments, if they are an employer and/or registered for VAT. Introducing mandated real time payments of tax would also discourage business start-ups and entrepreneurial behaviour in future which is surely something the UK Government wishes to avoid in the current economic environment.

Many self-employed individuals also do not make a taxable trading profit in their first year, due to one-off set-ups costs and initial capex, and as a result, relief is actually delayed for any trading loss which arises, which is currently of cash flow benefit to the Exchequer.

In their October 2019 report “Taxation and Life Events: Simplifying tax for individuals”, the OTS discusses in Chapter 6 the importance of tax education and awareness and makes a number of recommendations in this area.

A defined tax education programme would be of particular benefit to the newly self-employed. One suggestion which could also be examined as part of the focus on Budget Payment Plans set out in the Call for evidence would be to highlight these specifically to the newly self-employed as part of any tax education programme.

More generally in the context of the cash flow implications, smaller businesses, viable businesses suffering short term distress, businesses with seasonal trades and those with long creditor and debtor days would be especially impacted by mandatory real time tax payments.

One seasonal sector worthy of particular mention is the hospitality sector which often relies on takings from busier periods to sustain them through quieter trading periods. This sector has been one of the most impacted by the recent pandemic and, with the possibility of further variants of COVID emerging in future and the continuing need for public health restrictions, mandatory real time tax payments is of particular concern.

According to the Bank of England’s analysis “How has Covid-19 affected small UK companies?”, the pandemic reduced cash flows for many companies, with smaller companies "more likely than larger companies to operate in sectors that have been most affected by the shock, such as accommodation and food, arts and recreation, and construction”. However, this only examines the impact of the pandemic on small businesses. The UK’s departure from the EU has also had a major impact with exports to the EU still significantly below last year’s levels, according to data published by the Office of National Statistics.

There is no doubt that the economic impact of the pandemic and the disruption to businesses cash flows has lasted longer than anyone expected. There is little certainty at present as to if/when businesses will be able to return to pre-pandemic operating levels without the need for continuing public health restrictions. As a result, the UK Government needs to provide as much support as possible to ensure otherwise viable businesses stay afloat.

Although the easing of lockdown measures is picking up pace across the UK, numerous challenges lie ahead for businesses, including the expected long-term reduction in consumer demand and confidence. Given the scale of UK Government-backed loans now sitting on balance sheets, short term cashflow concerns may have dissipated for many businesses. But the real challenges are only starting with deferred tax and VAT bills beginning to crystallise, loans requiring servicing, staff returning from furlough, continued staff resourcing and hiring constraints and difficulties and rent arrears needing to be settled.

Many individual taxpayers and small businesses are already struggling to pay their tax bills and manage their cash flow in the current economic climate; these taxpayers are often just about surviving but are otherwise viable businesses. The introduction of a mandatory real time tax payments regime would therefore be extremely challenging.

Capital transactions and disposals and how tax would be accounted for, particularly in companies which pay CT tax on chargeable gains, would also create severe cash flow issues in a mandatory real time tax payments regime. This would be of particular concern where a business is sold and the sale agreement provides for staged payments of the consideration payable.

Although the Call for evidence is silent on the matter of penalties, a mandatory real time tax payments regime is likely to also impose penalties for failure to comply. The increased frequency of payments and reporting requirements could actually lead to more (and not less) errors, particularly where the final tax position differs greatly to that calculated on a quarterly basis. Many taxpayers, to save costs, could also turn to unregulated advisers to assist them in meeting with their increased compliance obligations. This, overall, would more than likely lead to an increase in penalties for underpayments of tax in real time.

Some final points are also very relevant in relation to cash flow as follows:-

the speed with which HMRC would handle repayments of overpaid tax in real time and the need for physical refunds to be made where required and not just credited against the estimated current-year liability in a business tax account – in the context of refunds there should not be any minimum or maximum repayment limits. To set limits on refunds/repayments would restrict a business from having the flexibility to request repayments where there is a working capital or other business cash flow need;

the need to carefully manage any transition to tax payments in real time, which should initially begin as voluntary payments only; and

the need for the taxpayer to have control at all times over the allocation of payments in their business tax account to minimise negative cash flow impacts as it is often not clear for many businesses until after the year-end tax process is completed what their final tax liability is.

Making Tax Digital

The views set out in our response to the 2016 consultation “Making Tax Digital: voluntary pay as you go” continue to hold today and even more so in the context of a conversation about potential mandation of real time tax payments. This was our overall concern in that consultation response; that voluntary pay as you go would inevitably lead to mandation of quarterly payments of tax in future. Not only does that now seem to have borne fruit, but voluntary pay as you go has been completely bypassed in the current conversation and should be revisited, as set out earlier.

The 2016 voluntary pay as you go consultation document mentioned that HMRC was planning a randomised controlled trial with self-assessment taxpayers in summer 2016 to test out “behavioural approaches around voluntary take up of more frequent tax payments”. We are not aware that the outcome of this trial has been published and we would be interested to see the results, assuming it took place, in the context of the current Call for evidence.

We are also concerned that the Call for evidence would seem to require mandatory real time tax payments by taxpayers not even within MTD. Setting aside the too low and unsuitable £10,000 exemption limit for MTD for income tax, the Call for evidence mentions that those not within MTD for income tax may still have to provide information to HMRC more frequently. If they did not do so, they would instead be forced to accept mandatory tax payments based on whatever estimates had been calculated by HMRC. This would seems to us to be a way of extending more frequent MTD reporting obligations to all taxpayers by the back door. Again, this could lead to taxpayers turning to unregulated tax advisers resulting in a higher level of errors and increasing penalties, the very thing MTD was designed to reduce.

It is disappointing how clear it is that earlier payment is in the Government’s sights however this is not an inevitable consequence of MTD. It is also very clear that linking MTD quarterly reports to the calculation of mandatory real time tax payments would result in very challenging practical difficulties for both ITSA and CT.

For many businesses, the year-end tax process of finalising the annual accounts, recognising annual reliefs, allowances (including capital allowances), deductions, and other claims and elections results in a final tax liability which very often looks completely different to the estimated tax liability of the business based solely on their quarterly filings.

ITSA and CT can therefore be said to be annual taxes. To compare the year-end tax process to paying monthly or quarterly utility bills, as the Call for evidence does, is simply not a valid comparison. For many taxpayers, their final tax liability of a particular tax year can only be accurately assessed on an annual basis once they have the whole picture and after year-end accounts have been prepared in accordance with UK GAAP. The estimated liability information potentially generated under MTD will simply not be sufficiently accurate to provide a reliable forecast, never mind act as a basis for calculation of mandatory real time tax payments.

The benefits of MTD were never intended for this; the Government’s MTD policy objective is to reduce errors as a result of improved, more frequent digital record-keeping. As MTD for VAT was first introduced in April 2019, we would therefore expect to see a reduction in the VAT gap from its 2018/19 level of £10 billion4 when the 2019/20 statistics are published later this year. Until those statistics are published, it is therefore difficult to assess if MTD is working as intended to reduce avoidable error. If it is not, how can it be used as a way of calculating mandatory real time tax payments.

The next steps in the MTD project take effect from 1 April 2022 when MTD for VAT is extended (to VAT registered businesses with turnover below the VAT registration threshold) with MTD for income tax due to commence from 1 April 2023. These are both significant changes in themselves. To further suggest there could be seismic changes to the ITSA and CT payments regimes from as early as 2025 is worrying particularly in the context of MTD for income tax which would only have completed one full annual tax cycle by then. In addition, MTD for CT is not expected to commence until April 2026 at the earliest.

Given more recent experiences and problems with the introduction of new online services such as the Trust Registration Service and 30 day reporting and payment for CGT, concerns remain if HMRC will have the capacity and funding to implement future changes properly and in a way which does not result in damage to UK businesses, and the economy. HMRC is currently failing to provide an adequate level of customer service in many business as usual areas. To suggest increasing the number of touchpoints between taxpayers, agents and HMRC would only add further pressure to these already strained resources, even if that contact were online.

Mandation of real time tax payments for ITSA and CT payment regimes, even if not introduced until 2025 at the earliest, would simply be too much. Once MTD has fully bedded for all taxes only then would there be an opportunity to reconsider real time payments, starting with voluntary payments.

At that point, a full, standalone consultation on real time payments should be carried out, which should take into consideration detailed research into how estimated liabilities from quarterly reporting information compares to final tax liabilities.

The current payment regimes, as mentioned earlier, will both be over 25 years old in 2025 – they are well known and understood by businesses and taxpayers and are workable. What this Call for evidence does not explore in any detail is the potential for other less challenging payment solution changes, such as changing the current payments on account regime for ITSA. Changing the CT payment regime for companies not within the instalment payment rules could also be explored. However the case for change would need to be clearly established first.

Conclusion

We look forward to engaging in further consultation in future on this matter. In the meantime, in the context of the foregoing, as a minimum, we believe that the following key points merit serious consideration: -

• HMRC should set aside the current conversation on mandation of real time tax payments and should instead, after establishing the case for change, explore less challenging payment solution changes such as changes to the current regime for ITSA payments on account including how Budget Payment Plans could be used by taxpayers and businesses more widely;
• The conversation on real time payment of tax should take a step back to focus on voluntary payments – however this should only take place once up to date evidence and analysis, including wider discussions with UK businesses and taxpayers is conducted by HMRC, which should explore the appetite for voluntary payment and clearly set out the case for moving to real time payments which should be the last stage in the UK’s move to its version of Tax Administration 3.0;
• HMRC should provide an update on the outcomes from building into its systems and messaging functionality which compares in-year tax calculations with payments on account due; and
• Tax complexity continues to be a very serious issue which not only threatens the ability of the UK Government to meet its 10 year tax administration strategy but is also a serious impediment to successful further and future digitisation of the UK tax system starting with MTD for income tax in 2023 - a defined roadmap to tackle tax complexity, beginning with income tax first must therefore be established as a matter of urgency.