Pre-population proposed to simplify tax

Imagine a world where, instead of the usual stress in the run up to the January tax return deadline, you have only to click a link (or open a letter), check that the data HMRC already holds for you is complete and correct and move on with your life. With all the necessary data supplied by your employer, investment manager and bank direct to HMRC, just think how much time you could save when dealing with your tax affairs.

It sounds like a fantasy but it’s not entirely impossible, and proponents of pre-population often point to Finland – where all individual taxpayers receive a return each year already completed with information that the authorities hold. While the system doesn’t cover those with self-employment or rental income, those with simpler tax affairs only have to engage with the tax authorities if, having checked the figures provided to them, they spot any errors.

To say that the Office of Tax Simplification (OTS) is considering that we could go as far as the Finnish model would be an exaggeration, but they are working on a review of whether the experience of dealing with tax could be made easier for individuals through smarter use by HMRC of third-party data.

The consultation, which closes next month, is considering what personal tax data could be used directly by HMRC in ways that could be helpful to individuals – and improve their experience of the tax system. This personal tax data could include:

• Bank and building society interest (building on the information already available)
• Dividends of UK companies and distributions from authorised unit trusts
• Distributions from UK and overseas open-ended investment companies
• Pension contributions
• Gift aid payments to charities
• Data from investment and wealth managers, including information about chargeable gains, excess reportable income, interest, dividends and equalisation payments
• Insurance bond chargeable events
• Royalties

In addition to potential benefits, the OTS are keen to hear what concerns individuals might have if their data was used in this way – and how these concerns could be managed. Looking at how pre-population is currently used is probably a good starting point for highlighting potential pitfalls of expanding the approach.

For many taxpayers, their main experience of pre-population is in the P800 system, where HMRC uses details of income from pay, pensions, state benefits, savings interest and employee benefits from various third-party sources to complete annual reconciliations. Hundreds of thousands of taxpayers receive a P800 each year, with these reconciliations throwing up refunds or demands for additional tax based on the information HMRC holds.

One of the big challenges of the P800 system is ensuring that data is accurately matched to an individual taxpayer. Problems are rarely reported with the matching of employment income, but do arise with bank interest. Since individuals are not required to supply their unique taxpayer reference (UTR) to their bank (and indeed not all taxpayers will have a UTR or NINO), matching relies on name and address data and errors such as duplications or omissions can and do arise. Furthermore, the system deals inadequately with common situations such as multiple joint owners of bank accounts, joint accounts where income is not shared equally between the holders and trustee accounts.

A case was recently reported to us where the bank information for one account was duplicated for the tax year in question. Despite numerous interventions by the taxpayer, and subsequent corrections by HMRC, over the last few months the system has reverted time and time again to the incorrect, double counted figures – forcing the taxpayer back to HMRC helplines. Issues with P800s are not isolated, and agents raise concerns every year on the Agent Forum.

For those within self-assessment, pre-population is fairly limited – HMRC’s self-assessment filing system can pre-populate with state and occupational pension but it doesn’t always, and there is a known error for state pensions where a full annual figure will be used in the first year of receipt rather than the part year amount. Oddly the system does not appear to pre-populate with employment data at all – although all taxpayers can access details of their employment income via their Personal Tax Account.

For agents, pre-population of employment and pension income for their clients via certain software products can help to speed up the production of returns but again, we receive reports each year of either data not being available, pensions reported as employment income or multiple employment or pension sources combined into single figures. Many agents would like to see these problems resolved before pre-population is expanded.

Wherever pre-population is used, existing usage shows how a key requirement is a robust matching process for taxpayers. Otherwise, errors in data matching will reduce confidence in the system. Wider use of UTRs and NINOs by third-parties like banks which could be included in data submissions would help, but not all taxpayers have these references. A new unique identifier for pre-population might be an alternative but that then increases complexity. There are also more limited solutions such as issuing NINOs at a younger age to deal with children’s accounts.

The second key requirement is that it needs to be very clear who is responsible for corrections and how matters will be put right if something is incorrect. Clear routes to report problems to HMRC are needed.

If the third-party provides incorrect data, then experience with the P800 process suggests that it can take taxpayers significant time to correct those errors – and until that happens HMRC’s systems can keep reverting back to the incorrect figures. If responsibility is to lie with the third-party, they will need to invest in processes to correct errors and update reports to HMRC promptly and many third-parties may not wish to invest time and resources into this at a cost with potentially limited benefit to themselves.

It should also be considered whether the data which is potentially available is even suitable for pre-population. For example, investment portfolios look like an attractive option for pre-population, but there are plenty of cases where that data alone is not sufficient to establish a correct position. Problems might arise for example where an individual has more than one portfolio or holds some shares outside of a portfolio.

While asking people to go through their records each year to find their tax return information is time consuming, there is also arguably some merit in encouraging people to engage with their tax affairs, rather than trying to remove that responsibility. If individuals place too much trust in the pre-population approach and don’t check what they are provided with, errors or omissions will continue to arise.

If you have views on the merits, or otherwise, of pre-population then the OTS would welcome views by April 9, 2021 and you can find their survey here.