Discussion document: Simplifying and modernising HMRC’s Income Tax services through the tax administration framework

Question 1

Summary

Accepted Answer

Subject of this consultation

This document explores simplification and modernisation of Income Tax services as part of the Tax Administration Framework Review.

Scope of this consultation

This discussion paper sets out the government’s plans to modernise Income Tax services and invites views. It focuses on the Pay As You Earn (PAYE) and Income Tax Self Assessment (ITSA) tax regimes. The government is particularly interested in encouraging taxpayers to transact with HM Revenue and Customs (HMRC) digitally, to ensure services are as quick and easy as possible for taxpayers.

Who should read this

The government welcomes engagement from any individual, business or organisation with views on how Income Tax should be administered and made simpler for taxpayers. This is likely to be of particular interest to the self-employed, landlords, accountants, tax agents, legal professionals, payroll professionals, bookkeepers, insolvency practitioners, software providers, financial advisers and their clients. Taxpayer representative bodies, charities and other voluntary organisations that help people with their tax affairs will also have an interest.

Duration

The consultation will run for 12 weeks starting on 15 March 2023 and ending on 7 June 2023.

Lead official

The lead officials are E Jordan, Y Carney, A Huggins, C Maudsley and W Carey of HMRC.

How to respond or enquire about this consultation

Any responses or queries about this consultation should be sent to tafrsimplification@hmrc.gov.uk.

Respondents should not feel that they have to respond to all questions in this document. The government also welcomes partial responses, focused on the individual aspects of Income Tax services that are most relevant to the respondent.

Additional ways to be involved

The government is keen to collaborate with a wide range of stakeholders and will organise a number of discussions to ensure that views are heard from across the range of taxpayers and intermediaries who interact with the tax system. Please contact HMRC using the details above if you would like to be involved.

Getting to this stage

In July 2020, the government published a 10-year strategy to build a trusted, modern tax administration system – the Tax Administration Strategy. This included a commitment to publish a call for evidence (CfE) on the legislative framework underpinning tax administration. That CfE was published on 23 March 2021 and a summary of responses was published on 30 November 2021. The responses contributed a broad set of inter-related ideas on how to update the tax administration framework.

Previous engagement

HMRC held preliminary discussions with several tax professional bodies, taxpayer representative groups and voluntary sector organisations, between July 2020 and January 2021 which considered the themes and opportunities set out in the government’s 2 calls for evidence, on ‘The Tax Administration Framework: supporting a 21st century tax system’ and ‘timely payment’, which were published in March 2021. The respective summary of responses documents were published on 30 November 2021.

A further CfE, ‘Income Tax Self Assessment Registration for the Self-Employed and Landlords’, was published on 30 November 2021 with the summary of responses published on 20 July 2022. The government has taken into account the responses to that CfE in this document and will continue to do so when planning next steps.

Question 2

1.  Introduction

Accepted Answer

Summary

1.1. This discussion document sets out the government’s current thinking on how to improve the tax administration framework to provide more modern and efficient Income Tax services and focusses on supporting a more digital way of working. This means more than simply moving existing processes from paper and telephony to digital channels; the government is aware that it needs to integrate and modernise those processes so that taxpayers can quickly and easily self-serve, and therefore choose to remain in digital channels.

1.2. In line with the HMRC Charter commitment to make things easy, HMRC will provide services that are designed around what customers need to do, are accessible, easy and quick to use, and minimise the cost to customers. The government will always support customers who are unable to access and use digital services. It will ensure that HMRC services can be accessed by those who are digitally excluded, and provision will be in place to meet their needs.

1.3. Your views will help shape proposals and how we implement changes, to make our tax system simpler, fit for the future and easy for taxpayers to engage with.

Areas explored in this document

1.4. In this document we are seeking views across a range of ideas, some of which are in the early stages, and some where the government has already set the direction and wants input on how to successfully implement changes. Some changes would require legislative change, others process change, and some both.

Developing and promoting the use of HMRC’s digital services

1.5. The document sets out the government’s intention to move rapidly to a digital by default approach for specified letters and forms sent by HMRC to taxpayers. To achieve this the government intends to reform the rules about how taxpayers give consent to communicate digitally with HMRC. The government also seeks views on how to get more taxpayers into digital channels to receive tax repayments. These changes are set in the context of HMRC’s longer term strategy to increase the use of self-serve and digital channels and to provide inclusive services that are easy to use, with increased support to remove barriers to digital services where appropriate. HMRC will provide (and clearly communicate) alternative provision to ensure that services can be accessed by those who are Digitally Excluded.

Pay As You Earn (PAYE)

1.6. The document highlights pain points which cause frustration to taxpayers and high operational cost to HMRC, focussing on coding notices and changes of circumstance. It sets out some tactical process changes that HMRC is working on, as well as seeking ideas for strategic change.

Income Tax Self Assessment (ITSA)

1.7. The document continues the conversation from the 2021 call for evidence on ITSA Registration for the self employed and landlords. It initiates a review of the administrative criteria used to determine which taxpayers receive a notice to file a return. It seeks input to help the government understand the issues and complexities faced by taxpayers. It asks for views on how the government could improve the criteria and make it easier for taxpayers to understand them, as well as on whether the government should consider more far reaching reform in this area.

Background

1.8. This document takes into account the feedback received in responses to the 2021 Calls for Evidence on reform to the tax administration framework and ITSA registration for the self-employed and landlords.

1.9. Previous evidence ^{[footnote 1]} given to HMRC, combined with its own customer insight, shows most issues faced by individual taxpayers are associated with PAYE and ITSA. This discussion document focusses on modernising those Income Tax services to improve taxpayer experiences and in turn reduce costs for taxpayers and HMRC, while helping taxpayers get their taxes right first time.

1.10. Large elements of the PAYE and ITSA regimes have been established as self-serve digital services for some years: all employers (except for digitally exempt employers) already submit real time PAYE information online, and more than 95% of ITSA returns are submitted online. There are remaining elements (such as PAYE coding notices and repayments) where taxpayers make greater use of non-digital channels. This causes high operational costs for HMRC, and means taxpayers often wait longer to get what they need than through digital channels.

1.11. HMRC is already making significant progress to improve the digital service it offers taxpayers, including committing to a new Single Customer Account (SCA). Building on existing digital tax accounts and the HMRC App, the SCA will enable HMRC and taxpayers to exchange information and manage tax more easily. It will be the place to go whenever people think of tax or benefits administered by HMRC. The SCA will be an interactive hub that will enable taxpayers to access new online services and update their accounts digitally, using one set of login details. They will be able to see consistent personalised information about their liabilities and payments so that they receive information relevant to their circumstances.

1.12. In delivering the SCA, the government will work with the voluntary and community sector to support those customers who need extra help. To meet digital service standards HMRC will make sure that people are not excluded from being able to use the service because they lack digital skills or internet access, providing appropriate assisted digital support to cover any gaps.

1.13. In parallel, HMRC will continue to iterate and improve guidance. HMRC content on GOV.UK gets around 1 billion clicks a year. Data shows correlations between low GOV.UK satisfaction and contact demand, indicating there is considerable scope to reduce demand by improving HMRC’s content on GOV.UK. HMRC has recently increased its capacity to build step-by-step interactive guidance and has delivered a range of products, which have been used by approximately 1.4 million taxpayers, averaging user satisfaction of 82%. HMRC will continue to ensure that alternative guidance formats are available to meet the needs of digitally excluded customers.

Question 3

2.  Developing and promoting the use of HMRC’s digital services

Accepted Answer

The move to digital

2.1. HMRC’s ambition is to provide simpler and more efficient services for taxpayers. Most taxpayers are digitally able and many report a better experience when using digital channels – accessing their information at a time and place that suits them. HMRC is committed to offering greater digital options to give taxpayers the digital experience they expect from a modern tax authority.

2.2. An increasing number of taxpayers use HMRC’s Digital Channels. In 2017 to 2018, the Personal Tax Account (PTA) and Business Tax Account (BTA) were used 73.8 million times by 11.3 million taxpayers, whereas in 2021 to 2022 these digital accounts were accessed 134 million times by 19.3 million taxpayers, alongside about 1.5 million taxpayers using the HMRC app. Satisfaction scores for HMRC’s online services are very high at 83.4%. Building trust in digital services is an essential part of successfully moving more interactions to digital.

2.3. The introduction of good digital channels has helped reduce contact by phone and post. However, HMRC needs an even higher proportion of taxpayers to self-serve online, so that it can provide the best possible service to all. HMRC’s aim is to improve the range and accessibility of its digital services and move as much taxpayer interaction to self-serve digital channels as possible. At the same time, HMRC will look to increase automation and the ability to self-serve in its non-digital channels wherever possible, while providing support for those who need it.

2.4. To achieve a digital channel shift, HMRC plans to provide easy to access digital services, with relevant support, to ensure that taxpayers experience a convenient and streamlined service. Once this is in place, HMRC will provide less choice around the non-digital channels it offers to taxpayers (such as telephony and post) to reduce the use of these channels, where users are able to go digital. HMRC will provide digital support to help taxpayers to remain in self-serve and digital channels. This will reduce the need for taxpayers to contact HMRC and will reduce the amount of paper HMRC posts.

2.5. HMRC will continue to work closely with the voluntary and community sectors to support taxpayers who need extra help, and to ensure that provisions are in place for taxpayers who are unable to access digital channels.

The Single Customer Account (SCA)

2.6. A single digital account for taxpayers, that is easily accessible and secure, is a key component of the government’s vision for a fully digital tax system and will be central to delivering improvements in digital services.

2.7. Many taxpayers already do some of their tax online, using their PTA, BTA and the HMRC app. As these services have been developed separately over the last few years, they have not always offered a unified and consistent experience to taxpayers.

2.8. Through the SCA, taxpayers will be able to interact with all their tax information in one place. As with online banking, the SCA will mean taxpayers can access information and services simply and easily via mobile app or online at a time and place convenient to them. Taxpayers will be able to see consistent information about their liabilities and payments, update their own circumstances, and, over time as services develop, be able to personalise their account so that they see and receive information relevant to their circumstances.

2.9. HMRC aims to implement its first phase of transforming digital services through the SCA by 2025. This will focus on transforming services for individual taxpayers and account functionality, with business needs addressed in later phases. New digital features will be released at regular intervals. Improvements planned for the first phase are:

improved sign in, security and subscription to digital services: HMRC is working with the One Login for Government programme to make it easier and more secure to sign in and subscribe to digital services
online changes to personal details: HMRC will start rolling out features to enable taxpayers to change their details (phone numbers, emails, address, marital status) online in a single place and have those changes apply to all services to which they are subscribed
tax codes: HMRC will work to help taxpayers understand and manage their tax code through digital channels
digitally access and store National Insurance Number: HMRC will release new services to allow taxpayers to digitally access and store their National Insurance Number

Reduction in paper communications from HMRC

2.10. This section sets out HMRC’s overall approach to our higher volume letters and forms and those to which it will apply (see the table below). Across the products described in this section, HMRC currently sends around 70 million items by post annually, at a cost to the taxpayer of around £40 million.

2.11. HMRC has, or is developing, good quality digital versions of all of these products. The increasing use of digital services and high satisfaction scores described at paragraph 2.2 lead HMRC to conclude that more taxpayers could and should receive letters and forms electronically. There are taxpayer benefits to doing so because information in the online accounts can be accessed securely at any time.

2.12. Therefore, over 2023 to 2024 and 2024 to 2025, HMRC will start to reduce the higher-volume letters and forms it sends out on paper and will instead provide these through digital channels. It will also do this for some key inbound forms. Initially HMRC will focus on a shift to digital channels for the forms and letters listed below.

2.13. HMRC intends to move towards requiring digital interaction from digitally capable employers and businesses. It has already confirmed that it will require the minority of digitally capable employers who still submit P11D and P11D(b) forms (reporting employee benefits and expenses) on paper to use online forms from April 2023. It will then move to providing digitally capable employers with P6 and P9 coding notices solely using digital methods.

2.14. To accelerate the pace at which the shift to digital can take place for individuals, HMRC will adopt a ‘digital by default’ approach for the high-volume forms listed below: this will mean that the default method of delivering letters and forms will be to place them into the online account. When taxpayers sign up for their digital tax account, we will assume that they are able to receive all products digitally unless they indicate they wish to opt out of digital communications.

2.15. Individual taxpayers will still be able to choose non-digital channels. HMRC will develop implementation plans for each of the products listed below to ensure a good service is provided to taxpayers who:

are digitally capable and prefer to interact digitally
are digitally capable but wish to opt out of digital communications
need non-digital channels to access their tax information, meet their obligations, and express their preferences

2.16. HMRC’s implementation plans will recognise that different approaches may be needed for different outputs, some of which require action from taxpayers to meet an obligation, while others are for information only. HMRC believes that the key to successful implementation will be communicating the changes at the right time to the taxpayers affected.

2.17. The letters and forms HMRC will move to ‘digital by default’ can be found in the table below. In implementing these changes, we wish to ensure the experience of using digital forms, and the change to doing so, are as good as possible. As below, HMRC will stop routinely sending some paper tax returns for the tax year 2022 to 2023. For other forms, HMRC will develop an implementation plan and communicate this in sufficient time to give notice to taxpayers and agents. Responses to the questions which follow below would be appreciated in order to refine our approach.

Letters and forms HMRC will move to ‘digital by default’

Form	Description
SA100/SA200	Self Assessment (SA) tax returns: HMRC will not routinely issue paper tax returns, starting with returns for the tax year 2022 to 2023. Taxpayers will still receive a paper notice to file the return and be able to order a paper copy of a blank return form by telephone.
SA316	Notice to file
SA300	Statement of account
SA250	Welcome letter
SA251	Exit letter
R002	Repayment notification
CT603	Postal notice to deliver a company tax return
P2	Employee coding notice
P800	Tax calculation

Question 1: What barriers do you experience when accessing digital versions of the forms above that drive you to a paper option? Are there any particular forms/processes that cause major issues?

Question 2: How would you like HMRC to provide support and guidance to assist digitally able taxpayers with accessing digital versions of the forms above?

Question 3: What would be your preferred options for the digitally excluded to access non-digital services for the forms above?

Reduction in Payable Orders

2.18. HMRC has recently completed user research on taxpayer experiences of the repayment process, seeking views on suggested changes and exploring barriers to taxpayers claiming repayments through their digital tax account. The research found, whilst there was overall high satisfaction with the current digital process, participants were keen to see fewer steps in the repayments process and some found the sign up and authentication process to be a barrier and were keen to see a simplified approach.

2.19. The research also found low awareness of the process for claiming repayments digitally and, amongst those who were less engaged with their taxes, the P800 notification and call-to-action could often be missed or not acted upon. Taxpayers also expect any changes that are made to the process to be done in a way that maintains their security and allows them to retain trust in HMRC. Participants had a desire for automation where possible and highlighted the importance of transparency.

2.20. If an employee has too much Income Tax deducted under PAYE, they will be eligible for an Income Tax repayment. PAYE taxpayers in this situation receive a notification from HMRC of their overpayment of Income Tax, following an automated reconciliation process after the end of the tax year.

2.21. Following this process, an overpayment is usually refunded in one of 2 ways:

if the overpayment is from the previous tax year only, taxpayers can request repayment via Bankers’ Automated Clearing System (BACS) through their online digital tax account or over the phone
if they take no action for 21 days, they will receive a payable order by post

2.22. At Budget 2021 the government announced that it would invest to make payments to taxpayers easier. HMRC is keen to enable faster, more secure, digital payments to taxpayers, so is therefore developing plans to reverse the default to paper for PAYE repayments. These PAYE taxpayers are generally quite distant from HMRC; they often only interact with HMRC when they have a PAYE overpayment, which may happen only sporadically. That means that less proactive taxpayers may not see the need to set up a digital tax account (the customer research found a strong feeling amongst participants that it was up to HMRC to get their tax right and that they should not have to do anything).

2.23. Instead of sending a payable order after 21 days if the taxpayer takes no action, HMRC plans to contact taxpayers to offer a choice between receiving a digital payment or requesting a payable order. This will help to prevent payable orders being sent to incorrect addresses and will allow taxpayers to self-serve and get their repayments more quickly, which will also reduce HMRC’s printing and paper costs.

2.24. There was appetite expressed in the research for some of the more transformative solutions considered, in particular those that increased automation and minimised effort on their part. The option to authorise repayments via a banking app was preferred by most participants as this was seen as easier, and more closely aligned to their behaviour and comfort authorising payments for other services. Participants also welcomed options to receive payment directly into their salary account, as this was simple and required minimum input.

Question 4: How can HMRC encourage more PAYE taxpayers to open digital tax accounts to help automate the repayment process?

Question 5: What safeguards should be in place for any new data HMRC collects?

Question 4

3.  Pay As You Earn (PAYE)

Accepted Answer

3.1. PAYE is a system operated by employers and pension scheme providers to collect Income Tax and Class 1 National Insurance contributions on behalf of their employees and pension recipients, with the liabilities of approximately 46 million individuals managed through this regime. In this section we outline some of the PAYE processes HMRC is seeking to modernise and invite views on the best approaches for this.

3.2. Existing PAYE processes work effectively for the majority of individual taxpayers and employers. But there are a few pain points that, with such large volumes of taxpayers, create significant operational cost to HMRC, and risk a poorer service to individual taxpayers and their employers. HMRC regularly gets very helpful feedback from HMRC forums and external stakeholders about where the pain points are and how they might be resolved.

3.3. HMRC continues to design ways to smooth these pain points through better communications, digitalisation, taking advantage of technological advances, and by increasing timeliness and accuracy of data provided to HMRC by employers and employees.

3.4. For example, in late 2022 HMRC published an improved starter checklist and guidance as well as increasing the level of interaction in the guidance about the coding notice. Taxpayers can answer questions about their circumstances in order to get tailored information to explain their code. HMRC has also made employment history information available digitally to individuals. This was in response to customer feedback and has been well received.

PAYE: Changes of Circumstance

3.5. When an individual starts a new employment, their employer should use the tax code on a P45 form from the individual’s previous employment. Where this is not provided, the employee should complete HMRC’s ‘starter checklist’ so their employer can determine the correct tax to deduct from their wages until HMRC issue a tax code, taking into account the employee’s individual circumstances, to their new employer.

Issues this can create

3.6. Through feedback and customer research on tax coding, HMRC often hears that tax codes do not reflect an employee’s current circumstances, especially where they start or leave a job, or when they newly start (or cease) to receive employment benefits in kind (for example, a company car) and expenses relating to their employment. The employee can be confused by the amount of their net pay after such a change (with too much or too little tax being paid) because the process hasn’t happened in time for the payroll cut off. This can be a problem, especially when someone leaves a job midway through pay periods or moves to a new pay period.

3.7. This scenario is becoming more common as individuals are more likely to have multiple jobs or change jobs more often than when PAYE was introduced. External stakeholder feedback suggests HMRC could do more to develop systems and processes to make coding more accurate in real time.

Opportunities for reform

3.8. HMRC is continuing to improve its guidance and correspondence to make it easier for taxpayers to understand their tax position, including the development of interactive guidance and regularly testing the wording of products to use the clearest possible language which taxpayers, employers and their agents find accessible.

3.9. HMRC continues to explore ways to help taxpayers understand how a change to their personal situation affects their tax position, including whether it can improve guidance, simplify tax coding notices, and improve the wording to make it more straightforward for taxpayers to understand their tax and National Insurance Contributions (NICs) deductions.

3.10. Improvements in HMRC’s digital systems already allow individuals to report some changes which will impact their tax code. Developments in the SCA will offer opportunities for taxpayers to check and amend the information HMRC holds about them.

3.11. HMRC is also exploring opportunities to improve the PAYE starter and leaver process by making it smoother and seeking to minimise confusion caused by changes to tax codes. This might be done by making best use of data (including being open to ways in which 2 way or more timely data reporting might generate improvements) or by providing clearer and more timely correspondence and helping employers to get the process right.

3.12. HMRC recognises there may be other opportunities to help taxpayers to better understand what the impact will be on their tax and NICs deductions when they start or leave a role or newly receive or cease to receive employment related benefits and expenses.

3.13. For HMRC to improve Income Tax services for taxpayers, it would also like to better understand how it can try to get tax codes more reflective of an individual’s circumstances more quickly when things do change.

3.14. HMRC is also open to any suggestions on alternative ways to calculate tax and NICs deductions in real time, without relying on tax codes.

Question 6: What specific processes or data points could be simplified to speed up information flow between employers, employees and HMRC when employees have a change of circumstance, while maintaining quality of data and keeping information secure?

Question 7: In what ways could advances in Information Technology allow for an alternative to the tax code or more real time interaction between employer, employee and HMRC to ensure that tax and employee NICs deductions keep pace with changes as efficiently as possible?

Question 5

4.  Income Tax Self Assessment (ITSA)

Accepted Answer

4.1. Like PAYE, ITSA serves a very large volume of taxpayers, with over 12 million people being asked to file annual returns. The work around the annual filing date is HMRC’s single biggest business event of the year. Any issues that cause taxpayers to contact us require significant HMRC resource and can slow down our support services for those who need us most.

New ITSA taxpayers: digital from registration onwards

4.2. HMRC sees a strong case for requiring new ITSA taxpayers to use digital services from the outset. HMRC accepts it is more difficult to change the habits of taxpayers who are used to calling or writing to HMRC, but the vast majority of ITSA taxpayers go on to submit annual returns online and therefore should also be able to interact with a digital registration service.

4.3. In the recent consultation on ITSA registration HMRC explained how the process of registration works ^{[footnote 2]}. Paragraph 2.2 sets out that increasing numbers of taxpayers are using digital channels. For registration we know that the majority of taxpayers already use an online registration service. Improving the digital registration experience could help taxpayers stay in the digital channel for their later interactions with HMRC under the ITSA regime and beyond. Using digital from registration onwards could help those taxpayers who later need to transition to obligations under Making Tax Digital for ITSA when it is implemented.

4.4. Paragraph 2.4 sets out an aim to reduce choice around the non-digital channels it offers to taxpayers. HMRC is seeking views on whether all, but digitally excluded taxpayers should be required to register for ITSA online, through their digital tax account. Using the digital by default approach, HMRC would assume consent from the taxpayer to receive future ITSA communications digitally, unless they opted out. HMRC would then deliver the taxpayer’s first notice to file digitally and require the first and subsequent annual ITSA returns to be delivered digitally.

4.5. Before implementing these changes HMRC would ensure there was a high level of taxpayer satisfaction with the digital registration service, and alternative services for the digitally excluded and for those groups to whom HMRC does not currently provide a service to file online.

4.6. HMRC would give adequate notice of this change to taxpayers and agents and would develop a plan to communicate it widely and clearly to those affected.

Question 8: Would you support a change to require new ITSA registrations to be made online, with a digital by default approach to subsequent notices to file, and a requirement for annual returns to be delivered digitally?

Question 9: How much notice would taxpayers and agents need for this change, and how could HMRC best communicate it?

Reviewing the circumstances in which taxpayers should file a tax return

4.7. Here, the government takes forward the discussion started in its 2021 call for evidence on ITSA Registration for the self employed and landlords. Respondents to that call for evidence had little appetite to:

bring forward the date of the current obligation to notify liability
replace the current obligation to notify a liability with a new registration obligation linked to the start of a trade or a property business

4.8. The government response to the call for evidence said that it would not move forward with those ideas at this time, as a result of that feedback.

4.9. Instead, the government committed to exploring new ideas put forward by respondents. The first of these was to review the circumstances in which a taxpayer should submit a tax return. We are prioritising this element and this document explores the ITSA criteria in detail. This is in line with calls from respondents for HMRC to set clear, simple rules for who they want in ITSA before looking at changes to registration policy and processes.

4.10. The next phase of work will turn to the other new ideas suggested by respondents to the call for evidence:

enabling taxpayers to make themselves known to HMRC sooner in a process that is separate from registering for ITSA. The feedback indicated an appetite for a new process that would allow taxpayers to engage with HMRC early, to access help and advice without triggering formal tax obligations. HMRC may also be able to use third party data to proactively reach out to taxpayers who need to come into the ITSA regime
reviewing the legal obligation for taxpayers to notify their tax liability. This will include reviewing whether notification is necessary, how the obligation works with registration and how it connects with other legislative provisions. Reviewing and improving the ITSA criteria could itself inform the need to simplify or remove the obligation to notify liability

4.11. The government also committed ^{[footnote 3]} to undertaking research into the experiences of unrepresented taxpayers at and around registration. That initial research has been done and will be published shortly. Emerging findings are that there is low awareness of Income Tax obligations and processes and a need for better and more targeted and proactive education and guidance from HMRC.

4.12. HMRC will work with a group of unrepresented taxpayers to gain customer insight to inform the development of ITSA registration policy options. HMRC is keen to learn more about the experiences of taxpayers who are low earners, those who have multiple sources of income and those whose circumstances change frequently.

The ITSA Criteria

4.13. HMRC wants taxpayers to understand whether they will need to submit a tax return, so that they can self-serve, making the right decision whether to register with HMRC and seek a unique taxpayer reference number (UTR) or to understand that they don’t, or no longer need to, submit tax returns. A clear, modern and rational set of ITSA criteria, supported by high quality guidance, should allow them to do that.

4.14. For any taxpayers who are not employees (such as the self employed, partners, landlords) ITSA is the way they report and pay tax, and where appropriate National Insurance Contributions, on their main source of income. For others who are employees, tax on their main source of income is collected through PAYE but they may need to use ITSA to report additional sources of income (savings, dividends, and so on).

4.15. HMRC guidance sets out the circumstances in which taxpayers should send an ITSA return. Taxpayers whose circumstances fall under any of the listed criteria are asked to register for ITSA so that HMRC can issue them with a notice to file a tax return.

4.16. HMRC can issue a notice to file a tax return to anyone within specified time limits. The taxpayer must then submit a return (or ask HMRC to withdraw the notice) even if they have no tax liability.

4.17. The criteria aim to bring the right people into ITSA. Broadly, these are people who:

have a liability to pay tax that is not managed through PAYE or another withholding regime
have complex tax affairs or are in a group where HMRC needs more information
need to use the ITSA regime to make a claim or election

4.18. The Annex sets out circumstances where HMRC asks taxpayers to send a tax return and why.

4.19. The criteria are not set out in legislation. They are administrative parameters. Some of them are based on tax exemptions, like the trading allowance, but the criteria themselves do not exempt taxpayers from paying tax if they have a liability.

4.20. Taxpayers who do not meet the criteria, but still have a tax liability that is not otherwise being paid, should contact HMRC to arrange for their tax to be collected. This will usually be done through their PAYE tax code for PAYE taxpayers, but HMRC may still require a return if that is the only viable mechanism for collecting the tax.

4.21. For some, completing a return in order to make a claim will be the only reason they report other income. For example, employees who want to claim expenses in excess of £2,500 need to submit a return to do so.

4.22. HMRC is keen to understand why many taxpayers who do not meet the criteria (for example where income falls below the relevant threshold) exercise the right to send a tax return even though they do not have a liability. They might do this, for example, to report income from savings and investments which do not result in a tax liability.

4.23. Guidance on GOV.UK about when to file a Self Assessment tax return is reviewed regularly. HMRC also publishes internal manuals and the Self Assessment manual sets out who should send a tax return. A tool based on GOV.UK guidance allows taxpayers to check if they need to send a self-assessment tax return.

4.24. HMRC would like to better understand the difficulties taxpayers and their representatives experience when navigating the criteria. Stakeholders report the following issues:

guidance – the guidance is not always easy to find and navigate or simple to understand. As a consequence, this could stop some taxpayers meeting their tax obligations to notify, file or pay. Feedback indicates the guidance does not help taxpayers navigate complex situations like multiple reasons for being in ITSA or where circumstances change frequently. They say there is inconsistent use of terminology like turnover and profit. They say it should be clearer that the criteria serve a specific purpose, what that purpose is for each criterion and that the criteria do not exempt taxpayers from paying tax if they have a liability
thresholds – these determine when HMRC will always require an ITSA return from taxpayers – see the Annex. Income Tax thresholds have not changed in recent years and as a result an increasing number of taxpayers are needing to navigate the criteria and, where applicable, then register and file. For those below the thresholds who have a tax liability the aim is to avoid asking for an ITSA return as those liabilities are likely to be collected in other ways. However, there is a perception that HMRC does not apply the thresholds consistently. Feedback suggests HMRC is inconsistent when deciding to code out amounts above and below the coding out limit
HMRC’s IT systems – in some cases, an ITSA return is needed because other HMRC systems do not have the facility to calculate and determine the correct tax liability. For example, the PAYE coding system does not accommodate High Income taxpayers with investments or foreign income
legislation – the legislation that sets out the obligation to notify determines what must be declared (income not subject to the exceptions) whereas the ITSA criteria are administrative parameters based on who should register for ITSA so that HMRC can send a notice to file. External stakeholders observe that this means that taxpayers who may not have a liability might still need to register

Question 10: Do you agree these are the main issues? Where possible please rank in order of magnitude/impact.

Question 11: What other difficulties do taxpayers face in understanding and navigating the ITSA criteria?

Question 12: What additional complexity exists for taxpayers who are navigating multiple criteria or for those whose circumstances change frequently? Where possible please give examples, including how you think HMRC can resolve the issues.

Opportunities for reform

4.25. Reducing complexity and simplifying how taxpayers understand and navigate the ITSA criteria could involve:

guidance – using interactive guidance products to support taxpayers to make the right decisions when navigating the SA criteria. Use these guidance tools to prompt digital registration. More transparency in guidance about the role each criterion plays in how HMRC administers the tax system
thresholds – considering how to reform the criteria so that they are better targeted, excluding taxpayers who do not need to submit a return. Critically reviewing each threshold to test how much value it adds to HMRC and taxpayers and removing, replacing or revaluing where appropriate. Consider mirroring models like VAT where there is one clear turnover threshold beyond which you need to register. Introducing consistency in the language used, for example, when setting criteria values or denominations (for example, turnover, profit, gross/net, etc) so that over time taxpayers collectively become more familiar with and understand better the purpose of ITSA criteria
IT Systems – exploiting new digital initiatives like the Single Customer Account to seek efficient ways for individuals to report income, make claims and maintain a digital footprint of income, tax and NICs, outside of an SA return. Utilise digital mechanisms to nudge and prompt taxpayers to the criteria to help them make the right choice. For example, for PAYE taxpayers the simplest and most efficient method to report income, claim reliefs etc may be through their tax code. For those taxpayers who are not within PAYE, it could mean exploring alternative ways for them to report income or establish a tax and NICs record other than through the SA return
legislation (1): codifying the criteria in legislation so that it is clear where there is a legal obligation to notify, register and submit a return. This could add certainty and simplicity but might also reduce flexibility (although use of secondary or tertiary legislation can be quite flexible). Simplifications will prioritise the most efficient means of adapting the criteria when policies or related legislation change or to keep pace with inflation or emerging compliance risks. At its boldest, the obligation to file returns might be attached to the codified criteria, making it unnecessary for HMRC to routinely issue annual notices to file: taxpayers would simply be lawfully obliged to file a return if they met one or more of the criteria for a tax year
legislation (2): looking at how taxpayers and HMRC interact more broadly when there is income, expenses and/or reliefs which PAYE cannot deal with. One option is to create a list of criteria that sets out when taxpayers need to engage with a HMRC Income Tax digital service, which would then determine the appropriate course of action. This might be coding out additional income, accepting a standalone claim or requiring the taxpayer to make a full ITSA return. This would evolve over time as HMRC introduces new functionality within the SCA

Question 13: Are these the right changes and opportunities to be considering? Are there others?

Question 14: In what way will each simplify things for taxpayers?

Question 15: Which are better? Could you rank in order of preference or greatest improvement?

Question 6

5.  Summary of consultation questions

Accepted Answer