The UK Tax Day – discerning the direction of travel
There was much speculation both before the Budget and the Tax Day on 23 March about what we might see in the way of tax changes. On the one hand there were a number of consultations on inheritance tax, capital gains tax and the administration of trusts which had taken place over the last few years without any follow up, and the report of the Wealth Tax Commission looking in detail at the possible introduction of a wealth tax: on the other hand mounting debt, a continuing pandemic and a fragile economy.
We were of course looking at this from our particular angle of advising clients on their UK tax affairs and wanting a more cohesive and consistent policy approach to the taxation of individuals and trusts. Our first reaction to the Tax Day publications was a mixture of relief (no frantic pre-5 April planning exercises) and disappointment (that our concerns had not been addressed). But what was published on Tax Day is about tax policy in a wider sense and there are some interesting angles.
A tax system for the 21st century
On 21 July 2020 there was a spate of announcements from the Treasury, including a report on ‘Building a trusted, modern tax administration system’ which had been trailed in the 2020 March Budget comments about creating a tax system for the 21st century. This set out a 10 year vision of what it meant for policy (making Tax Digital work), systems (looking at the timing and frequency of taxes and the technological infrastructure required) and law and practice (a reform of the tax administration framework).
The Command Paper on 23 March sets out measures to deliver this 10 year vision and combines tax administration reforms, policy development, simplification measures, updates on existing consultations and new consultations. It also signals a clear wish to separate the development of policy from the ups and downs of Budget changes.
Calls for evidence – the tax administration system
In broad terms HMRC want a modern and resilient framework which tax payers can navigate, uses technology well and enables tax to be paid on time and correctly. They are looking at this in a wide-ranging way, specifically mentioning the pre-population of tax returns in Italy, the use of key performance indicators in Australia to assess perceptions of fairness in tax disputes and the effectiveness of digital tax in South Korea. They are keen to have any other international examples or models of tax administration which can help them.
Calls for evidence – tackling non-compliance
This is not new. The UK has been addressing offshore tax compliance for many years now as have the OECD, the US and the EU. The UK’s approach in the No Safe Havens Report 2019 has both elements of wanting to crack down on non-compliance because of what it means in terms of criminal and terrorist activity as well as the policy angles of wanting to ensure efficient reporting and proper tax payment.
The discussion document ‘Helping taxpayers get offshore tax right’ which asks for comments by 15 June notes that errors involving offshore taxes account for over 10% of the overall UK tax gap. It acknowledges that this is often not deliberate and the taxpayer has often taken reasonable care. It cites various reasons for this including not being aware of offshore tax obligations, guidance and communications relating to offshore income not being relevant tor clear, reliance on anecdotal evidence or out of date advice and lack of timely professional support (ie leaving the tax return to the last minute).
We would add to this that the complexity of the tax affairs of any clients needing tax advice in cross-border situations and the complexity of UK tax legislation in this area can make compliance a difficult and expensive burden.
The increased reporting under FATCA, CRS and other automatic exchange of information initiatives means that HMRC now have a huge amount of data. The discussion document look at ways HMRC might use this data to prompt taxpayers and their agents about offshore assets where reporting might be needed. Currently taxpayers may receive ‘nudge letters’ which may or may not be relevant. Specifically the document asks if it would be helpful to send reminders to trustees about 10 year anniversary charges (which has become much more relevant to trustees with UK residential property in their structures since 6 April 2017) and to provide those who are managing a deceased person’s estate and are required to complete inheritance tax forms with the information they hold on offshore assets held by the deceased.
The document also though looks at the self-assessment foreign pages and how more detail might help HMRC. Again there is a lot of focus on the use of digital prompts.
Calls for evidence – preventing and collecting international debt
A further discussion document again requiring comment by 15 June looks at debt (international tax debt) which has arisen where a UK resident individual has overseas assets on which tax is due, a non-UK resident individual has a UK source tax liability or a UK individual has moved abroad without settling their UK tax affairs, an area where collection levels are very low (35% as compared with a 90% collection rate for domestic tax). The exchange of data helps HMRC as should other initiatives such as The Registration of Overseas Entities Bill but in a sense the data informs them of what international tax debt is arising while not helping the collection. The intention is to have a system which prevents it arising in the first place but, if it does, to see how it can be collected proportionately and effectively.
Achieving better knowledge and higher tax collection
For a whole host of reasons the Chancellor is delaying any tax hikes. But this work on the tax policy and systems should over time deliver more tax too. It is hard work re-designing a tax administration framework but we hope that in the re-design sorting out the current complex tax legislation is not forgotten.