Closed consultation

(Draft) Explanatory Memorandum to the Income Tax (Additional Information to be included in Returns) Regulations 2024 

Published 14 March 2024

1. Introduction

This explanatory memorandum has been prepared by HM Revenue and Customs (HMRC) and is laid before the House of Commons by Command of His Majesty.

2. Declaration

Nigel Huddleston, Financial Secretary to the Treasury at HM Treasury confirms that this Explanatory Memorandum meets the required standard.

Zoë Nettelfield and Declan Norris, Deputy Directors for Strategic Data Policy at HMRC, confirm that this Explanatory Memorandum meets the required standard.

3. Contact

For queries about this instrument, please email Colin Connor at HMRC.

Part One: Explanation, and context, of the instrument

1. Overview of the instrument

What does the legislation do?

This instrument is one of a package of 2 statutory instruments being laid by HMRC with the objective of improving the quality of the data collected by HMRC to provide better outcomes for taxpayers and businesses, as well as improving compliance, resulting in a more resilient tax system.

These regulations specify additional information about dividend income, which shareholders in owner-managed businesses are required to provide via their Self Assessment return and, secondly, information on start and end dates of self-employment which the self-employed are required to provide via their Self Assessment return to HMRC.  

Where does the legislation extend to, and apply?

The extent of this instrument is UK.

The territorial application of this instrument is UK.

2. Policy Context

What is being done and why?

Improving the information provided to HMRC on Self Assessment returns will provide better outcomes for taxpayers and businesses, as well as improving compliance, resulting in a more resilient tax system. 

Start and end dates

HMRC currently collects incomplete information regarding the start and end dates of self-employment through Income Tax Self Assessment returns as questions on whether a business started or ceased trading within that tax year are voluntary to complete. 

Making these questions a mandatory part of the Self Assessment return will improve HMRC’s understanding of the characteristics of the trading population, supporting small business compliance and allow help to be provided earlier in the business lifecycle whilst also providing HMRC with a better understanding of those businesses who have ceased trading.

Dividends

Many individuals who carry on their personal business through a company, Company Owner-Managers (COMs), remunerate themselves mainly by way of dividends rather than through payments of salary. Under current reporting mechanisms, it is not possible for HMRC to distinguish between the origin of dividends received and whether they are derived from an individual’s own company or as dividends from other sources. This makes it difficult to separate this group out from other dividend taxpayers and to then identify and understand issues they face in making tax easier to get right, for example, ensuring they receive appropriate targeted communications about issues they may encounter in their tax affairs. 

Requiring COMs to declare separately from other UK dividends received the amount they receive from their own companies will give HMRC a better view of the total package of remuneration received by COMs from their own company, improving HMRC’s understanding of this population, allowing better targeting of tax administration and policy interventions, as well as helping focus compliance activities.

What was the previous policy, how is this different?

HMRC were unable to collect the information with which this instrument is concerned through tax returns on a mandatory basis.

Start and end dates

Income Tax Self Assessment for the self-employed and the equivalents in Making Tax Digital for Income Tax Self Assessment currently include questions on whether your business started or ceased trading within that tax year. However, completion of these questions is voluntary, which results in incomplete information of limited use.

From April 2025, the effect of this instrument is that these questions will be made a mandatory part of the Self Assessment return requiring all self-employed persons to tell HMRC whether their business started and/or ceased trading within that tax reporting year and if so, provide the relevant dates. 

Dividends

From April 2025, the effect of this instrument is that COMs must declare separately from other UK dividends received the amount they receive from their own companies. The existing questions on the Self-Assessment return asking whether the individual is a company director of a closed company will be made mandatory. New mandatory questions will also be added requiring the value of dividends received from the close company and the percentage shareholding in the company of which the individual is a director.

A person completing a personal tax return who has been a director of a close company during the year to which the tax return relates must, by virtue of this instrument, provide the following information in the return:

• the name and registered number of the close company
• the amount of dividend income received from the close company that year
• the person’s highest percentage shareholding in the close company that year

4. Legislative and legal context

How has the law changed?

These regulations specify additional information which persons are required to include in certain tax returns which they may be required to make and deliver to HMRC.

These regulations are made pursuant to the new sections 8(1J) and (1L), 8A(1H) and (1J) and 12AA(5F) and (5I) of the Taxes Management Act (TMA) 1970, which were inserted by section 36 (Additional information to be contained in returns under TMA 1970 etc) of Finance Act 2024. They require:

• the start and end dates of relevant business activities to be included in personal returns, trustee returns, and partnership returns
• information about directorships, close companies, and dividend income from close companies to be included in personal returns

Why was this approach taken to change the law?

Primary legislation under section 36 (Additional information to be contained in returns under TMA 1970 etc) of Finance Act 2024 amended sections 8, 8A and 12AA of the Taxes Management Act 1970 to enable HMRC to require additional information to be collected through personal, trustee and partnership returns. Regulations are required in order to specify such additional information. The present regulations are therefore required in order to achieve the aim of obtaining this new information.

Consultation

Summary of consultation outcome and methodology (to be completed after the technical consultation).

4. Applicable guidance

Guidance will be updated when this measure comes into force (at the start of the tax year 2025 to 2026).

Part 2: Impact and the Better Regulation Framework

5. Impact assessment

A full Impact Assessment is submitted in draft with this memorandum and will be published alongside 2 related draft statutory instruments.

Impact on businesses, charities and voluntary bodies

There are no significant impact on charities or voluntary bodies.

This measure is expected to have an estimated impact on up to 1.2 million self-employed businesses each year and around 0.9 million directors of owner-managed businesses, who will be required to submit information to HMRC by 2026. 

There is no significant impact on the public sector.

Monitoring and review

What is the approach to monitoring and reviewing this legislation?

The measure will be monitored and reviewed alongside other measures in the government’s wider package for data collection and sharing changes.