Most taxpayers unaware of important and imminent changes to the tax system
The House of Lords Economic Affairs Committee has today published its Report on the Draft Finance Bill 2016 and is concerned about:
- Communication: important changes to the taxation of savings and dividends will come into effect in a matter of weeks. Taxpayers are unaware of this and should be notified directly of the changes. HMRC's current communications strategy is inadequate.
- Complexity: the complexity of the tax system and compliance burden placed on individual taxpayers is growing. The Government must demonstrate how it is delivering a simpler tax system.
- Consultation: the consultation required by the 'new approach' to tax policy making is not being carried out consistently.
- Confusion: the absence of any roadmap for changes to the taxation of savings and dividends results in confusion and hinders taxpayers' ability to plan for the longer term.
The Committee looked in detail at three areas of the draft Bill: the clauses reforming the taxation of savings and dividends; those providing new powers for HMRC to issue Simple Assessments of an individual's tax liability; and those establishing the Office for Tax Simplification (OTS) on a statutory basis. They considered each of these from the perspective of how far they simplify the tax system and their impact on the compliance burdens of taxpayers.
On the proposals for changes to the taxation of savings, which will see the abolition of the Tax Deduction Scheme for Interest (where banks automatically deduct tax from most interest before it is paid), the Committee says most taxpayers are unaware of the imminent change, and whether or not they may have to file a tax return and pay tax to HMRC on interest earned in future. The Committee calls for an effective strategy of communicating with taxpayers and a “public awareness campaign led by HMRC in partnership with banks, building societies and other financial institutions. Using a wide variety of media, including more traditional approaches, it should aim to inform savers of both their tax obligations and the need to review their savings choices in the light of the changes.”
The Committee welcomes the simplification the changes will bring for most taxpayers but points out that for some the change will bring significant complications. The proposed design will lead to unfortunate results such as high marginal rates for those on the edges of tax bands.
On the introduction of Simple Assessment the Committee welcomes the move to assess individuals' tax liabilities on the basis of third party information saying it could remove the burden of Self-Assessment from a large number of low income tax payers. The Report calls on HMRC to take urgent action to clarify and publicise its plans for implementing the new Assessments, the responsibilities of taxpayers receiving Simple Assessments, and the information they can expect to receive from HMRC and third parties.
The Report calls on the Government to provide a comprehensive assessment of the impact on businesses and individuals of the longer-term move to digital accounts. HMRC must take responsibility for plans to educate and support taxpayers, particularly those unfamiliar with, or without access to, digital technologies.
The Committee also heard the concerns of business about HMRC's plans, currently under consultation, for mandatory digital record keeping to support quarterly reporting by businesses to HMRC. This, the Committee heard, was seen by businesses as a prelude to quarterly payments resulting in increased compliance costs and disruption to business cash flow. The Committee urges HMRC to undertake a full assessment to address these significant and widespread concerns.
The Committee welcomes the move to put the Office of Tax Simplification on a statutory basis and compliments the OTS on its work. The Committee also recommends that the OTS should be given a bigger role in the design of tax policy and greater resources to support its important work.
Commenting, Lord Hollick, Chairman of the Committee, said:
“Changes to how we are taxed can have a huge impact on financial planning including savings and pension arrangements. It is vital that taxpayers know what it is expected of them and how much they will be taxed. We are concerned that the Government's consultation and communication about imminent and important changes in the Finance Bill has been so poor.
“A great many savers will have no idea that from April they may for the first time have to check whether they need to report or pay tax on interest they have received, rather than have their bank deduct the tax they owe. HMRC's communication strategy has been inadequate and seems to rely on financial institutions informing their customers of the change. That is not good enough. HMRC must now roll out a public awareness campaign that takes account of those not digitally engaged and the needs of older people who may be more likely to rely on savings income than those of working age.
“Looking forward, the Government's proposals for quarterly reporting have caused considerable disquiet in the business community. Prior to the publication of the next Finance Bill, the Government must engage with businesses to address their concerns about the administrative burden of mandatory digital record keeping and clarify how quarterly reporting will be implemented. Small businesses fear that the introduction of quarterly reporting is a ‘Trojan horse' for the introduction of mandatory quarterly payments which could damage the established cash flow of many small businesses.
“We have been very impressed with the work of the Office for Tax Simplification. The Government is right to put the OTS on a statutory basis. It should also give them a bigger role in tax policy and the resources to take on that responsibility.”