The Government is currently seeking views on the case for reforming registration for Income Tax Self-Assessment (ITSA) for individuals with income from self-employment or property.
At present, individuals must give HMRC notice of liability no more than six months after the end of the tax year in which the taxpayer became liable. As this obligation is tied to the tax year, the timing of the obligation in relation to the start of self-employment can be very different for different people. For example, an individual who starts self-employment on 5 April 2022 needs to tell HMRC by 5 October 2022 (6 months) whereas an individual who starts self-employment one day later, on 6 April 2022, does not have to tell HMRC until 5 October 2023 (18 months).
Proposals for reform
The Government is suggesting that the current deadline of 6 months from the end of the tax year in which the taxpayer becomes liable could be reduced to 1, 2, 3 or 4 months but this does nothing to solve the disparity depending on the point in the tax year that the business starts – as some would still have over a year in which to notify.
AAT members views
The above proposal for reform proved deeply unpopular with AAT Licensed Accountants, with just 5% backing the idea in a 2022 survey on the subject.
In fact, 40% of AAT Licensed Accountants want the existing time periods to remain untouched and 10% suggested they should be lengthened.
However, there was also strong support for the idea of completely breaking the link with the tax year. 40% of AAT members agreed that “…there should be a new obligation to tell HMRC about the new self-employment or property income at a specified period after it starts rather than there being any connection to the tax year.” A further 5% would like a reduction but are unsure by how much.
A reduction and delinking from the tax year was also the overwhelming view of members of the AAT Tax Panel who met in January 2022 to discuss the issue.
Delinking registration with the tax year reflects the situation in a number of other countries. For example, in Rwanda anyone opening a business is obliged to register for tax within 7 days of starting their business activity.
With particular regard to landlords, in Poland anyone earning rental income is required to make monthly calculations and payments to the Polish Tax Office by the 20th of the month, following the month in which rent was received. This appears to work reasonably well but the example of Singapore is perhaps best given there is no need to calculate liability based on a particular day of the month.
In Singapore landlords must notify the authorities within 15 days of the start of their tenancy agreement. This is all done entirely online via a dedicated portal. This is also required for any rent increases i.e. they must be registered online within 15 days of coming into effect. Failure to comply results in a hefty fine of 5,000 Singapore Dollars (just under £3,000) plus interest.
In choosing between a reformed obligation or a completely new obligation, AAT would probably favour a new obligation given this would address more of the existing problems with the process and deliver greater benefits to all.
As the Call for Evidence states, if taxpayers interact with the tax system early, they get the best opportunity to understand their tax obligations and prepare for paying tax. Likewise, AAT recognises that for many self-employed taxpayers, registering for ITSA also opens the door to important additional benefits, such as paying Class 2 National Insurance Contributions to build entitlement to a state pension, accessing tax free childcare or the construction industry scheme.
A change to a completely new obligation would also address a sizable issue with regard to simplicity and fairness whereby some are required to notify within six months and others have up to 18 months to do so, with the discrepancy based on nothing more than the day on which they started their business.
Reducing the tax gap and increased revenue for the Exchequer are naturally benefits that need to be considered too.
Given most AAT Licensed Accountants (85%) believe the current ITSA registration process is not well understood by the elf employed or landlords or only understood with the help of an accountant or other professional, the case for reform appears to be significant.
Accountants want to help
Finally, when surveyed earlier this month, an overwhelming 95% of AAT Licensed Accountants expressed a desire to register their clients for ITSA, with none stating they did not know or required more information and only 5% stating, “I would NOT like to get involved in the registration process on my client’s behalf.”
As a result of this very clear support from its membership, AAT also supports the idea of utilising intermediaries, such as accountants, to improve tax registration and has urged HMRC to further explore such possibilities as soon as possible.
Phil Hall is AAT's Head of Public Affairs and Public Policy.