Clause 35 - Additional information to be contained in returns under TMA 1970 etc

Finance Bill – in a Public Bill Committee at 2:00 pm on 16 January 2024.

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Question proposed, That the clause stand part of the Bill.

Photo of Nigel Huddleston Nigel Huddleston The Financial Secretary to the Treasury

Good afternoon, Mr Paisley. Clause 35 makes changes to improve the data collected by HMRC. That will enable HMRC to collect more accurate and timely information, helping to make tax easier to get right and harder to get wrong, and providing better outcomes for taxpayers and improving compliance. Clause 36 introduces a new simplified and fairer system of penalties for the late submission of tax returns and late payments of tax, for those taxpayers who voluntarily join Making Tax Digital for income tax self-assessment from 6 April 2024.

Turning to clause 35 in a bit more detail, the Government’s economic response to the pandemic was only made possible through the powerful use of data to make big policy decisions and deliver Government interventions. HMRC’s information about employers, employees and the self-employed was key to delivering both the furlough scheme and its self-employed equivalent, the self-employed income support scheme. The pandemic also highlighted gaps where a lack of data meant that the Government could not provide support to specific groups. For example, in the initial phases of the self-employed scheme, some self-employed people were excluded because they had only recently started a business and HMRC did not have the data needed to identify them and their potential entitlement to support.

Clause 35 will allow HMRC to improve the data it collects and will help the Government address some of those gaps, build a tax system more resilient to future economic crises and improve tax compliance. It will give HMRC more data to help develop and target digital nudges and prompts to positively influence changes in customer behaviour and help them to get their tax right first time.

The changes made by clause 35 will require employers, company directors and the self-employed to provide additional data to HMRC. All employers who operate pay-as-you-earn as part of their payroll will be required to provide more detailed information by specifying the number of hours employees are paid for. Employers already must provide this information within broad bands of the number of hours their employees are paid for, but now they will need to provide the actual number of hours paid.

Through self-assessment returns, taxpayers will be required to provide dividend income received from their owner-managed businesses separately from other dividend income, and the percentage share they hold in those businesses. Taxpayers should hold that information already. This change builds on the current requirement to report a global figure of total dividends received from all sources through self-assessment. Again, via their annual self-assessment tax return, the self-employed will be required to provide start and end dates of their self-employment.

We listened carefully to the views expressed in the public consultations. That is why, following initial feedback from stakeholders, the Government narrowed down the data items we proposed to collect from six to three. We are taking a measured and proportionate approach, and are collecting improved data only in areas where taxpayers already hold it or already provide it voluntarily through the tax system. This approach will minimise any additional administrative burdens. It will help both taxpayers and HMRC by enabling efficiencies that will allow HMRC to better help those who most need support.

On clause 36, the Government’s new system of penalties was legislated for in the Finance Act 2021 and introduced for VAT-registered businesses from 1 January 2023. It replaces the current system of immediate financial penalties for late submission of a tax return and late payment of tax with a fairer and simpler regime. The changes made by clause 36 affect taxpayers who voluntarily join the Making Tax Digital for income tax self-assessment service from April 2024.

The new system penalises those who persistently fail to submit returns or pay tax on time, while being more lenient on those who make occasional mistakes. This will create a more consistent penalty regime for VAT and income tax self-assessment taxpayers, and a fairer system overall.

For taxpayers volunteering for the service from April 2024, the reformed penalties will be applied only where an annual filing or payment obligation is not met. They will not be penalised for the late submission of the quarterly updates required by Making Tax Digital. No taxpayers are required to join Making Tax Digital for income tax self-assessment until at least 2026, and that is not changing.

Photo of James Murray James Murray Shadow Financial Secretary (Treasury) 2:15, 16 January 2024

As the Minister said, clause 35 makes changes to the types of tax return for which HMRC collects data. According to the Government’s policy paper on this matter, the modifications are for the purpose of improving and enhancing the quality of the data HMRC collects. We understand that the changes are designed to enable HMRC to create regulations specifying additional information it considers relevant to the collection and management of tax.

We understand that HMRC intends to implement three new requirements. First, employers will be required to provide more detailed information on employee hours worked by real-time information PAYE reporting. Secondly, shareholders of owner-managed businesses will be required to provide the amount of dividend income received from their own companies separately from other dividend income, and the percentage share they hold in their own companies via their self-assessment return. Thirdly, the self-employed will be required to provide information on start and end dates of self-employment via their self-assessment return.

The Opposition recognise that this is a significant change, and it is clear from the Government’s policy paper on this matter that it will also incur large costs for businesses. The one-off impact covering transitional costs for businesses is estimated to be £44 million, while the extra ongoing annual administrative burden is estimated to be £9.6 million. The Chartered Institute of Taxation has conveyed its concerns that it seems unrealistic that the average transitional costs to businesses of providing the data on employee hours will be just £18.42. Does the Minister believe that the costings are accurate for businesses that will need to plan for the new requirements?

Beyond the forecast costs to businesses, there is also the question of data gathering and its purpose. This clause gives HMRC the power to collect taxpayers’ data. Is the Minister confident that the legislation provides appropriate authorisation for the purposes of the measure? The Institute of Chartered Accountants in England and Wales is concerned that it has not been fully explained why data concerning employee hours is relevant for the purposes of the collection or management of the taxes listed in section 1 of the Taxes Management Act 1970. The Institute believes that the legislation will not work to obligate employers to report hours worked to hours paid, as hours worked are not needed for the collection and management of tax. I would be grateful to know the Minister’s response to this concern.

We recognise that the timescale for introducing these measures is 2025-26, which will require HMRC to be ready and businesses to have got to grips with the necessary processes, guidance and software by then. What engagement has the Minister or HMRC had with businesses about this timescale, and has the Treasury considered drafting regulations for consultation prior to the legislation being enacted?

Clause 36 makes changes to the existing regulation-making powers that enable the Treasury to bring into force the penalties set out in schedules 24 to 27 of the Finance Act 2021. The new system that the schedules in the 2021 Act introduced will impose points-based sanctions for late submissions of returns and penalties for late payment of tax liabilities. We understand that the Government are planning for this system to come into effect with relevant self-assessment customers from 6 April 2026, through Making Tax Digital. Our understanding is that clause 36 will affect only volunteers who agree to test out the MTD system, which will therefore be before 6 April 2026. For the avoidance of doubt, will the Minister confirm that that is the case and make absolutely clear what penalties and sanctions such volunteers could face? Could he also confirm exactly what is meant, in the explanatory notes to the Bill, by the phrase:

“Where a change in circumstances means that HM Revenue and Customs does not have the functionality to support a customer, they may be moved back into the existing penalty regime.”?

There is a wider question about the timetable for delivering Making Tax Digital, which has slipped again and again. I would therefore be grateful if the Minister could make clear whether he has full confidence that the introduction of MTD for the self-assessment customers who are mandated for it is on track to happen by 6 April 2026.

Photo of Nigel Huddleston Nigel Huddleston The Financial Secretary to the Treasury

I thank the hon. Gentleman very much for those questions and comments. I think he has a good understanding of the purpose behind the changes we are making, particularly in the context of the anxiety that many of our constituents face. We all had correspondence on this during the pandemic, when people were frustrated at not necessarily being able to get some of the support mechanisms for which they believed they were eligible because of that lack of information and data.

The macro point and the purpose behind the changes is well understood, and the hon. Gentleman is right to focus on the micro points. When it comes to the voluntary process, for example, which I will come on to in a moment, the whole point of having it is to learn before we make it mandatory. We expect and anticipate that we will need to learn from this experience, but going through that voluntary step first seems like a good process.

The hon. Gentleman mentioned the administrative burden on businesses as a result of this ask. We have chosen three out of the six because the information should be on hand or readily available already, so what we are endeavouring to do should be relatively straightforward. HMRC has been exploring with stake-holders how best to implement the proposals in a way that minimises burdens on businesses. No one wants to put a disproportionate administrative burden on businesses, but for the reasons that I outlined in the introductory comments, we see an upside to asking for the information. In practical terms, it will help nudging and supporting businesses to ensure that their taxes right. Should we face a situation such as the pandemic again, we will be in a much better position to understand the nature of businesses.

The hon. Member for Ealing North mentioned data and gave a total cost of £45 million for implementation of the measures. For the hours-worked data, the total estimated one-off cost to businesses is about £35 million. In subsequent years, the ongoing cost will and should be negligible. For the dividends data, the total estimated up-front cost is about £9 million; again, that remains consistent for subsequent years. For the start and end dates, there are negligible one-off costs, with total year-on-year costs estimated at about £600,000. Those costs are the current estimates based on the standard modelling approach and the measuring of administrative burden. We will of course keep a close eye on the costs.

I mentioned the variety of purposes and means by which that information could be useful, but the hon. Gentleman also made a point about information sharing, an issue that many stakeholders raised in the process of our updating this policy. I should note the work of the House of Lords Sub-Committee that investigated these issues and asked me similar questions not so long ago. I refer hon. Members to the answers I gave there, as well as further support. I want to provide the assurance, however, that there are strict laws about the sharing of data between Departments.

HMRC’s ability to disclose the information it holds to anyone is restricted by the Commissioners for Revenue and Customs Act 2005. Only by acting in accordance with the provisions of the Act can HMRC ensure that information is disclosed in a lawful way. Section 18 of the Act provides that HMRC must not disclose HMRC information to anyone unless there is a lawful authority to do so, and that includes other Departments and their agencies, local authorities, the police or any other public authority.

As I said, I am happy to respond further to the hon. Gentleman or to make further comments if I have not answered all the questions. However, I commend the clause to the Committee.

Question put and agreed to.

Clause 35 accordingly ordered to stand part of the Bill.

Clause 36 ordered to stand part of the Bill.