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Responses to voluntary pay as you go consultation

Who wants to give HMRC money before it becomes payable? Not many, I would guess but there may be some who would find it a useful way to budget for their forthcoming tax bills.

‘Making Tax Digital [MTD]: Voluntary Pay as You Go’, one of the six consultation documents HMRC released back in August 2016, looked at the options under MTD for a taxpayer to make and manage their voluntary payments and considered how these payments would be allocated across a taxpayer’s different taxes. In particular, the document proposed that:

  • taxpayers would decide how often and how much they wanted to pay. These might be regular set amounts, isolated payments or payments based on estimates of liability;
  • there would be no such thing as a missed voluntary payment, so a taxpayer was not committed to, or chased for, payments;
  • voluntary payments would be repayable on request, up until the credits were allocated to a tax becoming payable;
  • voluntary payments might need special indicators, depending on system functionality, and would be paid and repaid electronically; and
  • voluntary payments would sit on a taxpayer’s account as a credit, allocated against tax liabilities as they become due, using HMRC’s rules for allocating payments, with unused credits carried forward for use against future liabilities.

The recently published response document, Making Tax Digital: Voluntary pay as you go (PDF), suggests that whilst the majority of respondents were supportive of the voluntary nature of the payment concerns remained over a number of key issues.

Complicated looking digital tax account

There was a risk that problems would arise if the payments weren’t easily identifiable in the digital tax account, and there needs to be clarity over their eventual allocation.

The increased number of transactions arising due to the display of estimated in-year liabilities and the combination of different taxes could give a very confusing and busy picture.

Where’s the incentive?

A recurring theme amongst respondents was that there was unlikely to be a significant take-up of voluntary payments. Most businesses would be reluctant to pay earlier than required and those that were willing would already be putting money aside in their own savings account. New businesses may be the most receptive to voluntary payments as they would not face the same cash flow difficulties as existing businesses.

As HMRC have no plans to pay interest on voluntary payments, taxpayers would therefore be less likely to ‘invest’ money with HMRC and only pay sums which they felt comfortable with the Revenue retaining.

Even with incentives, it was still felt that take-up would be low.

Speed of repayments

It was considered essential that tax repayments are simply and easily accessible, as otherwise there could be negative impacts on a business’ cash flow. HMRC will therefore ensure that the online facility to claim a repayment is quick and simple to follow.

However, there will be restrictions on repayments shortly before a tax liability becomes due. Opponents to such a restriction pointed out that:

  • until tax is due HMRC has no right to withhold a repayment
  • it would destroy confidence in the “voluntary” aspect of these payments
  • cash flow management is crucial for many small businesses
  • the crown has no preference over other creditors
  • HMRC has the power in some circumstances to take funds from a taxpayer’s bank account to meet debts

As repayments will not arise automatically on voluntary payments, in all cases a repayment will have to be requested. Taxpayers requesting a repayment may be unaware of the consequences of proceeding shortly before a liability becomes due, which may prove to their detriment, and it is therefore important that their decision to proceed is fully informed. With this in mind, the government proposes that repayment requests of unallocated voluntary payments made within 30 calendar days of tax becoming due should trigger a message advising the amount, nature and due date of the tax liability, the interest and penalty consequences if payment is not subsequently received by the due date, and asking the taxpayer to confirm their intention to proceed with their request.

Where a request for repayment is made within seven days of tax becoming due, a restriction of an amount up to the liability will occur unless all the liabilities within the previous 12 months have been paid within seven days after the due date.

If a taxpayer has been the subject of enforcement action in respect of unpaid tax within the previous 12 months, the government reserves the right not to proceed with a repayment request up to the amount of any tax becoming due within the next 30 calendar days.

Right to allocate payments against a particular tax

It was pointed out that under common law principles, the taxpayer has the right to allocate payments against specific liabilities, and it is only in the absence of a taxpayer allocation that HMRC can decide where a payment can be used. Payments should therefore be allocated in the most beneficial way for the taxpayer, usually the oldest, interest bearing liability.

Whilst HMRC is considering the allocation and set-off of payments generally, they have said that they will ensure money can be allocated in the taxpayer’s best interest so as to minimise debt (including interest and penalties) without the need for queries or further interaction from the taxpayer.

Technology

Previous experience caused some respondents to question the capabilities of HMRC’s IT systems, especially in relation to updating liabilities due with payments made.

One person suggested that free software needed to have voluntary Pay As You Go functionality built in so that no-one was excluded from it. HMRC say that they are committed to ensuring that the software industry makes available products to properly display information on voluntary payments, to ensure a positive experience and confidence in making voluntary payments.

A general held view was that fraudsters will always try to target systems and attempt to steal repayments. There are, however, processes in place within HMRC to reduce the incidence of repayment fraud.

Voluntary means exactly that

It was considered essential that HMRC makes it clear that voluntary payments are entirely optional and the message should be loud and clear so that taxpayers do not feel they have to make payments that they can ill afford or end up overpaying through ignorance. HMRC have confirmed that this will be reinforced through guidance and at all points where voluntary payments are referenced.

Finally, there was an interesting observation that voluntary payments could be used to hide money from creditors, by moving money from a private or business bank account to HMRC even when there is no tax liability.

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