Under the current rules, newly self-employed individuals and new landlords who are not already registered for self-assessment need to notify their chargeability to HMRC by October 5 following the tax year in which they started to trade or receive property income.
In a consultation launched last year, HMRC is looking to see whether that deadline is too late and whether self-assessment taxpayers should be obliged to engage with the tax system much earlier in the process of setting up their business.
When to register for income tax is a fairly fundamental question and is clearly something HMRC are taking seriously, having recently hosted six roundtable events on the topic.
The potential proposals as set out in the consultation comprise two options:
- Move the October 5 deadline closer to the end of the tax year,
- Redesign the registration process entirely and link it to either the start of the trade or when the business turnover exceeds £1,000.
Is earlier better?
HMRC’s concern is that the later someone engages with the tax system, the more likely they are to have problems, such as unexpected tax bills they can’t afford or penalties or sanctions for missing deadlines. HMRC also wants people ‘in the system’ in the belief this will encourage good record-keeping habits from the beginning.
In principle, it is true that early engagement could help to avoid unpleasant shocks later on. In fact, evidence included in a footnote to the consultation suggests that almost 70 percent of the 310,000 new self-assessment registrations in 2019-20 were made in the year people started to trade. Meaning the majority of people are already choosing to following HMRC guidance to register as soon as they can.
What neither the consultation nor the workshops got to the bottom of is who isn’t hitting the October 5 deadline – and why not? The October deadline probably appears to be a fairly arbitrary date to any person new to self-assessment, but if the problem is a lack of awareness of this deadline, it’s not clear how replacing one unknown date with another, earlier one, will help.
Do we need a registration obligation?
What the consultation doesn’t ask is whether we really need a registration obligation at all. Arguably, as long as new taxpayers are ‘in the system’ by January 31 does it matter when they tell HMRC they are now in business?
This is a tempting proposition – particularly as late notification penalties are not often seen in practice as long as someone can pay any tax due by January 31. However late registration penalties are used in situations where people have avoided registration for significant periods, and there does need to be some form of registration deadline to impose these.
The second option is a complete redesign, asking people to register either a few months after starting the business, or after their turnover reaches £1,000. Both of these obligations would bite a lot sooner, but introduce problems around identifying the precise start dates of the business or require an understanding of what comprises gross turnover.
It could also bring in a lot of very small businesses unnecessarily, as under the existing legislation registration is strictly only needed where there is a tax liability. The current process of notification after the tax year allows people to look back and consider their position when all the facts are known.
Prompts, nudges and data sharing
The final element of the consultation looks at the possibility of using third party data to identify those who should be in self-assessment. This sounds like it could be helpful but it’s not really clear what HMRC has in mind here.
The list of potential sources of information includes providers of business insurance and buy to let mortgages. Without knowing who or what sort of taxpayers are not registering on time there is a risk of a lot of irrelevant prompts being issued to compliant individuals.
The response from our members to the proposed changes has been lukewarm, with limited enthusiasm for changing a well-known and familiar process.
From the perspective of ‘taxpayer experience’, the primary concern from our members is not the underlying obligation itself but the fact that HMRC’s systems and processes to achieve registration are not easy to use or joined up.
Agents frequently must resort to filing on paper when online options are not available to them, the process of agent authorisation and registration is disconnected and, even when the online systems work, we receive regular reports of bugs or problems. Fixing these issues, and improving the signposting on Gov.UK for the unrepresented, would go a long way to help improve the position for taxpayers.
The consultation closes on March 22, after which HMRC will need to digest all the responses. They say that if there is an appetite for reform then there will be further consultation in 2022 on a more detailed proposal with a view to changing the rules from April 2024 at the earliest.