Making better use of third-party data

The consultation set out to:

• “Improve the customer experience and HMRC’s day-to-day performance by reducing the volume of information taxpayers must provide” - this would be welcomed by taxpayers and agents alike. Anything that can simplify the tax compliance process and potentially take some individuals out of self-assessment altogether can only be a good thing. However, success here requires accuracy of data and the right visibility for agents should an individual choose to engage a professional to manage their personal tax affairs on their behalf;
• “Close the tax gap by helping taxpayers get their tax right first time and ensuring HMRC has higher quality data to support better casework activity” - this aim is also an admirable one. Again, anything that reduces the tax gap by eliminating scope for non-compliance and helping to reduce errors can only be a good thing. However, BBSI in particular, is already reported to HMRC by financial institutions, and in many cases automatically pre-populated into individual’s returns. So, it will be interesting to see what changes here in practice, compared to the current status quo; and
• “Modernise and reform its digital service, reducing costs and administrative burdens for both HMRC and taxpayers” - once again this is something we can all get behind!

As the consultation itself recognised, HMRC have already been receiving data on BBSI for decades. However, with higher interest rates in recent years, and the continued impact of fiscal drag (under which more individuals are drawn into paying more tax as a result of keeping allowances fixed whilst incomes rise), the number of taxpayers with interest income is increasing. HMRC forecast that almost one million extra taxpayers will have to pay tax on their savings by 2028/29, when compared to 2022/23 levels. This, together with the general focus on digitisation and better use of data, has caused the Government to revisit its approach.

It's worth emphasising that in many cases, information received from banks is already matched to an individual’s tax account and processed accordingly. However, this isn’t always the case, and so this initiative sets out to:

• “Improve and expand Pay-As-You-Earn (PAYE) coding out of interest income – which can help remove the requirement for many taxpayers to complete an Income Tax Self Assessment (ITSA) return;
• Introduce pre-population of interest income in ITSA – to modernise the customer offering helping taxpayers get tax right first time;
• Improve its targeted approach to compliance and debt management based on a fuller view of customer circumstances; and
• Provide wider customer service improvements, including presenting more accurate tax forecasts to taxpayers in their digital tax account.”

Probably.

In the March 2020 Budget, the Government introduced plans for the introduction of a ‘Single Customer Account’ (SCA). The premise here being a single online service in which all of an individual’s tax data is held.

It was envisaged that the SCA (the online portal through which an individual can access and manage all of their personal tax information) would be underpinned by a Single Customer Record (SCR) – essentially a database housing all the underlying information which is surfaced in the SCA.

Critically, the vision was that individual SCRs would automatically be populated from a myriad of third-party data sources, receiving data from banks, wealth managers, pension providers, charities, and other organisations – using this information to automatically populate the SCA with data such as:

• Bank interest;
• Dividends and other investment income;
• Pension contributions and receipts;
• Charitable (gift aid) donations;
• Capital disposals; and
• Excess reportable income (ERI).

This was set out in a report titled ‘Making better use of third party data: a vision for the future’ published by the Office of Tax Simplification in 2021, outlining its recommendations on the use of third party data and its vision for the future.

The recently closed consultation is just addressing a small aspect of the grand vision of the SCA and the SCR that was originally trailed over five years ago, but nonetheless underlines a continued focus from HMRC, and an indication of the overall direction of travel.

There can be no doubt that HMRC are continuing to focus on making better use of third party data, and we can only expect the scope of the initiative to widen over time. It’s more a case of ‘if’ rather than ‘when’.

With this in mind, financial institutions will need to continue to think about data, and if they are set up for the future as the landscape evolves. Having a well-structured data schema, and a strategy for managing data is going to be more important than ever in the years to come. Organisations should be ensuring they have a process for managing data that allows them to manage all compliance processes in a holistic manner – from investor tax reporting all the way through to Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) reporting.

In a world of ever-increasing digitisation, data is very much king. The principles set out in this consultation are not new; but they are important. They highlight the continued direction of travel from HMRC and the clear policy intention to make better use of third-party data, simplify the compliance process for taxpayers, and close the tax gap by cracking down on non-compliance.

Whilst this consultation should perhaps be viewed more as an ‘evolution’ of the existing regime, rather than a ‘revolution’ (as was arguably trailed with the premise of the SCA), it marks the start of a journey towards the simplification of the UK self-assessment system, hopefully negating the need for tax returns altogether for a large proportion of the existing self-assessment population.

So, whilst there’s something to look forward to, it is hoped this is a quick stepping-stone to expanding the scope of the initiative to other types of investment income, and other areas such as pensions and gift aid, as was originally envisaged when the SCA was first muted five years ago.

For further information please contact:

• Jamie Richards