Complexity breeds mistakes

KEY POINTS

• LITRG is the voice for unrepresented taxpayers.
• PAYE processes should be simplified so taxpayers can more easily understand their tax.
• Better communication from HMRC would aid compliance.
• Interaction between tax and the benefits system should be improved.

Whatever happens on election day in May 2015 and in the five years of the next parliament, one thing is certain: the tax system will not get any simpler.

This may not be a problem for people with advisers: they will continue to pay professional fees to have their affairs guided by specialists who will master each new complexity as it emerges, ensuring their clients stay on the right side of the law.

But the millions of taxpayers on low to modest incomes who cannot afford professional fees will have to do their best to follow the system unaided, knowing that any mist

Many people on low incomes have complex tax affairs. This is due in part to the inherent complexity of tax legislation, but also to the way the system is administered. When things go wrong for this population, the consequences can be catastrophic financially, leading to debt, stress, anxiety and ill health.

The Low Incomes Tax Reform Group (LITRG) was set up by the Chartered Institute of Taxation (CIOT) in 1998 to give a voice to taxpayers who are unrepresented unless they can enlist the help of volunteer advisers.

The group brings together former and current tax professionals, including former big four partners and ex-HMRC senior officials, alongside LITRG’s own experts. It also includes specialists from other organisations with an interest in this area, such as Tax Help for Older People.

Seeking improvement

Central to the group’s work is developing and advancing its own ideas for improving the tax system for those it represents.

As we head towards a new parliament this is an opportune time to set out some proposals for improvements and changes to the tax system that would benefit low-paid people and others.

We do not generally take a position on tax rates or the overall structure of the tax system, as these are matters for politicians.

In essence we seek a tax system that operates in a way that everyone can navigate and recognises that support may have to be tailored to individuals to enable them to comply.

Consequently, some of these changes are geared towards helping groups that are particularly vulnerable or have particular difficulties with the tax system.

Others, such as some of our proposals for improving PAYE, would benefit much larger swathes of the population. While some of our proposals involve a change in legislation, others require changes to HMRC guidance or procedures only.

Recommendations

We hope that the next government will take up the following recommendations in this manifesto in the new parliament.

We are ready to work with policy makers – the devolved bodies as well as Westminster – to assist in making the tax system work better for low-income taxpayers.

Improve the PAYE system to bring greater clarity and accuracy for taxpayers, and lower administrative costs

The PAYE system keeps tax relatively simple for most people with a single, steady job, but the increasing numbers of taxpayers who have multiple employments, or move between employments, has made it harder to ensure that the correct tax is deducted from every pay packet each month.

With the responsibility placed on taxpayers to check they are paying the right amount of tax, this needs to be as simple as possible. The following changes would make the task much easier for the unrepresented taxpayer.

• HMRC should develop a unified notice of coding so that taxpayers with more than one income source can see at a glance where their income comes from and how it is taxed.
• Every taxpayer should receive statements at the end of the tax year showing all benefits paid and whether they are taxable. For example, a typical pensioner on a low income could receive the state pension (taxable) and Christmas bonus (non-taxable) in one payment. There is currently no mechanism to enable the recipient to check that he is paying the right amount of tax on his taxable pension while not paying tax on the bonus.
• Review the possibility of the Department for Work and Pensions (DWP) operating PAYE on the state pension. The tax status of the state retirement pension is a great source of confusion among low-income pensioners. The DWP is the most prevalent pension provider in the UK, and the only one that is not required to operate PAYE on payment. This recommendation would make things much clearer for the individual pensioners and avoid many year-end problems.
• Provide a simpler mechanism for collecting small PAYE debts. One-off debts identified in the P800 should be collectible by a simple mechanism without the taxpayer having to self-assess, with the difficult paperwork that entails, and automatic penalties for late filing or payment.

Better communication and education on tax matters by government

It is crucial that taxpayers and tax credit claimants can find quickly and easily the information they need to comply with their tax obligations, and that the tax rules are set out in a form and language that can be easily understood by the ordinary taxpayer.

We believe there is an obligation on government not just to provide information on tax and tax credits but to draw the attention of taxpayers to guidance relevant to them.

• Upgrade guidance provided on GOV.UK to make it clearer and more comprehensive. Since GOV.UK took over from the HMRC website, the information available to individual taxpayers and tax credit claimants has lacked essential detail making it, at best an over-simplification, at worst hugely misleading. We fear particularly for those who are not made aware of the full extent of their obligations and risk incurring a penalty for failing to do things they are not told they must do.
• Improve communication and application of special relief. This is a relief of last resort applied when the time limits for displacing an HMRC determination in the absence of a self-assessment have expired, and it would be unconscionable for the department to collect the tax assessed by the determination. Even taxpayers who have missed all the deadlines have an opportunity to align their tax liability with their actual income, rather than the Revenue’s estimate. People need to know that this relief is available to them.
• Improve communication and guidance for tax credit claimants, especially when couples separate. Recent adverse publicity in the national press about “undisclosed partner investigations” by firms such as Concentrix has brought this issue to a head. Whether or not two people form a couple is usually straightforward, but it can be uncertain when a relationship stops or starts, or whether two people living in the same home are necessarily living together as a couple. Concentrix and HMRC are often reluctant to accept satisfactory evidence that a single claim is genuine, forcing the claimant to appeal. Proper guidance on this contentious issue is urgently needed.
• Ensure that guidance on the new pensions regime includes adequate support on taxation issues. Perhaps the biggest issue facing unrepresented pensioners after April will be how their pension drawdowns under the new liberal regime will be taxed. Apart from the 25% tax-free lump sum, drawdowns will generally be taxed as income in the year when received; the PAYE system will rarely deduct the right amount of tax but will more often cause them to pay too much tax, or in some cases too little.
• Expand education on finance and tax in society, particularly in schools. The sooner young people understand how to decipher their payslips, what their tax and National Insurance contributions are for, and the basics of the tax system, the less likely they are to run into difficulty in later life. It will also have the added benefit of explaining citizen responsibilities at an early age.

Make paying tax as easy as possible for taxpayers with particular needs

Most people struggle to understand their taxation responsibilities, or find it difficult to find the information they need to check their tax position. But some, because of age, disability or some other factor, need particular consideration.

• HMRC’s “needs enhanced support” (NES) service should be promoted and expanded, and similar practice extended to other government departments. NES replaced the enquiry centre network, which closed in June 2014, and has made a good start. The challenge now is to ensure that people in and outside HMRC know about it, and those who need it can easily make contact when necessary.
• Channels other than digital must be provided. As communication with government moves increasingly online, the 17% of the population who cannot access the internet must not be left behind.
• Continue and increase support for the tax charities to enable them to help those who cannot afford professional tax representation. The charities Tax Help for Older People and TaxAid are lifelines to their clients, particularly when HMRC face continual retrenchment and cannot provide the service to taxpayers they once could.
• Continue to seek opportunities to simplify the tax system for unrepresented taxpayers.

Improve how the tax and benefits systems work together

The tax system collects money for the state. The benefits system doles out some of it again. The ways the two systems interact are not always fair, logical or consistent.

• Consider accompanying future increases in the income tax personal allowance with equivalent changes to the work allowance within universal credit. Universal credit is supposed to ensure that work pays. It does this by allowing maximum credit without any reduction on the first slice of earned income (the “work allowance”). The current policy of freezing the work allowance will erode work incentives over time, and contrasts oddly with the policy of above-inflation increases in the personal allowance for tax.
• Interactions between taxation and benefits must be considered fully by the Scottish and UK governments before any further devolution.
• Review treatment of the self-employed under universal credit. Under current proposals, the employed will be treated much more favourably under universal credit than the self-employed, due largely to the method of accounting imposed by the DWP and in particular the minimum income floor. We would like to see that discrimination removed so that the benefits system does not distort individuals’ decisions about the work they do.

A tax system that recognises the distinct challenges of self-employment and agency work

Self-employed people are responsible for their own tax and National Insurance calculations and payments.

This requires navigating a complex world of profits, losses, expense deductions, capital allowance claims, business record checks and a set of rules for benefit and tax credit entitlement which are more tricky than those facing employees.

Surveys regularly identify tax complexity as a prime complaint of small business owners.

• HMRC should make more flexible tax payment arrangements for the self-employed. Cash flow for very small businesses could be improved if HMRC acted on recent budget commitments to introduce more flexible methods of paying tax, such as by monthly instalments, which would also work better for those claiming universal credit.
• A clear approach from government to the use of umbrella companies would bring greater certainty for low earners. More coherent tax treatment of the cost incurred by low-paid people in travelling to work would drive out the temptation for workers to acquiesce in abusive schemes used by engagers of their labour.

Ensure limits and thresholds keep up with the cost of living

Failure to increase limits and thresholds so that they keep their value in an inflationary economy is tantamount to a policy to erode them year by year.

In particular, the rent-a-room relief which provides tax relief for those who take in a lodger should be doubled and index-linked in future; it has not increased since 1997.

Conclusion

The LITRG is grateful to ministers of successive governments and to civil servants at all levels for being willing to listen to, and occasionally act on, our proposals.

The FA 2014 completed a useful set of reforms, for which we argued, that enable more disabled people to make use of tax-favoured trusts, and the 2014 autumn statement announced the extension of the £2,000 employment allowance to older and disabled people who employ carers, and a limited tax simplification for carers who take a meal with their employers or stay overnight.

There is much that government, not just HMRC, can do to make life easier for unrepresented taxpayers. They can, for example, adjust systems and processes to minimise the likelihood of mistakes.

This is the thinking behind the group’s recommendations, few of which are political (indeed most are quite dull and technical); but they would help most individual taxpayers.

Issue: 4494 / Categories: Comment & Analysis , Admin , Compliance