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Rethinking the Tax System: Building the U.K.’s Tax Authority Back Better

Nov. 19, 2020, 8:00 AM

Like every other organization, HM Revenue & Customs (HMRC) has had to react fast to change the way it operates because of the pandemic and deliver a range of new services to support business. Despite the fact that paying significant amounts of money to taxpayers is not normal practice for HMRC, in part due to the inevitable losses to fraud, HMRC has paid out billions to businesses to protect jobs and keep the economy running.

It is important to acknowledge the impressive work that HMRC has done this year and I certainly encourage HMRC to keep and further strengthen the progressive new systems and reforms it has been forced to adopt to help it fully bring the U.K.’s tax system into the 21st century.

Better Communication

Traditionally, HMRC has seemed reluctant to adopt the use of email communication to administer taxes but that changed during the pandemic and it seems it has been a successful innovation. Communication is quicker and is effective.

Homeworking is another area that HMRC has adapted to very well. Following the government’s advice that all employees that are capable of working from home should do so, HMRC delivered on its duty to provide further communication on the application of the homeworking allowance. A good example of this was the online portal that HMRC recently released, which enabled taxpayers forced to work from home to claim home-working expenses. The portal was easy to use, with tax relief given at marginal tax rate, enabling basic rate taxpayers over the tax year to benefit by 62.40 pounds ($82.95) and higher rate taxpayers by 124.80 pounds.

I have also been impressed by how timely and targeted much of the guidance has been, with HMRC adapting its processes to help individuals and business sectors most impacted by Covid-19. For example, following the government announcing a value-added tax (VAT) cut for the hospitality and entertainment sectors, HMRC was quick to make this change as seamless as possible, as well as issuing guidance to inform businesses about their obligations to pay bills, with the deferral ending June 30, 2020.

VAT is one of the key areas of tax that will be impacted by the currently unknown Brexit deal, if one is brokered. At this stage it remains a significant challenge for businesses to prepare for the U.K. being outside of the EU, but HMRC’s “Get ready for Brexit” information service is a hugely useful tool, which provides a wide range of information to businesses.

HMRC was also successful at working with the various professional bodies and representative groups in clarifying the rules for Coronavirus Job Retention Scheme (CJRS) claims as they went along—open dialogue with industry bodies was already good but has been particularly effective during the pandemic and I hope it will continue for the long term.

Successful Support Measures

It is well documented that HMRC established and rolled out the CJRS, Self-Employment Income Support Scheme (SEISS) and Eat Out to Help Out schemes in remarkably quick time, but lessons should also be taken following the significant estimated CJRS mistakes and fraud. A calm and rational review of the process will be needed in due course but there is little doubt that reimbursing claims in arrears is much safer than paying out cash, although the need for immediate cash flow for business was paramount at the time.

HMRC has also taken a sensible approach to tax deferments and Time to Pay Agreements (TTPAs) so far. It is great that they allowed online application for TTPAs of up to 30,000 pounds in tax—much simpler and allowed HMRC to manage the surge in applications in recent months. Clearly, keeping this online mechanism (albeit with perhaps a lower threshold) seems like a sensible option for the future—it naturally sits alongside the Business Tax Account concept as a one stop shop for managing your business taxes online.

HMRC Resources

The pandemic has accelerated the move to agile work practices for many organizations; this has coincided with HMRC undergoing a massive ongoing restructuring exercise to centralize all its offices into just five large hubs across the country. This has meant losing thousands of experienced staff who do not want a long commute. Ironically, many HMRC staff will now be working from home. An efficient tax system needs modern IT systems and practices: Making Tax Digital is an essential pillar of this but it also needs well-trained and experienced staff; let us hope flexible working will in future help HMRC with recruiting and retaining its best staff.

Specific Building Back Tax Measures

Finally, it seems likely that that “building back better” through green taxes and subsidies would win the Chancellor some plaudits. Blunt measures like a fuel duty increase have in the past been politically difficult to implement despite the environmental benefits, and I suspect the Chancellor may leave it unchanged citing “economic reasons.”

It is more likely that car benefit charges will jump and tax reliefs be reduced or removed for non-electric vehicles. I would expect new incentives to buy electric cars such as a diesel scrappage scheme and there will have to be more investment and subsidies to roll out EV charging stations across the country (rather like broadband roll-out). Once the U.K. is outside the EU, the Chancellor may also resort to new car purchase taxes to discourage sales of the most polluting petrol and diesel vehicles (possibly even for secondhand vehicles)—a far cheaper way to “level up” prices with new electric vehicles.

A further long-term aim should be to centralize the business rates system—based on rents actually paid with both tenant and owner paying and tax rate set and revenues allocated to landlords based on the postcode of the property.

There are many challenges ahead, but so far the signs are positive that HMRC is here to help and is showing the willingness to provide a more modern tax system.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Paul Falvey is a Tax Partner who has considerable experience of working with international businesses and regularly advises on a range of corporate transactions including acquisitions and disposals, restructuring, and international tax planning. He can be contacted at: Paul.falvey@bdo.co.uk.

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