Budget: The future of tax administration

In recent years tax administration, (broadly how HMRC collect revenue and make payments) has been the subject of a series of consultations. The challenge being how best to achieve modernisation while balancing the compliance burden on taxpayers with protecting the public purse. What does the Budget tell us about the future direction of travel on this?

In overview, the Chancellor has committed to simplify the tax system and has identified three strategic priorities for HMRC: closing the tax gap, modernisation and reform, and improving their customer service for taxpayers.

Further detail on HMRC’s modernisation ambitions is promised in spring 2025 but the Budget announcements gave a hint of what is to come – more digitalisation and improvements to collection of data.

For companies specifically, the Government has recognised “that the underlying HMRC systems that support corporation tax are outdated” so we can expect to see future changes targeted there. The priority for now seems to be on supporting smaller businesses with software and data, but longer term we may see more ambitious reform to integrate tax within the day-to-day systems and processes of larger and more complex businesses.

Of interest to all taxpayers is the announcement of a consultation in early 2025 on modernising how HMRC acquire and use third-party data with an aim to make compliance easier for taxpayers. We expect this to be a revival of the Office of Tax Simplification’s 2021 proposal to introduce a single customer account containing data reported to HMRC directly by third parties including banks, pension providers, charities and investment managers. This should ease the burden on taxpayers to gather and report this information themselves but will come with an increased compliance burden for the affected third parties.

More immediately, new powers for HMRC are also on the cards with the following proposed reforms being consulted on:

• Introducing requirements for additional information to be provided upfront in respect of claims and reliefs (similar to the information requirements introduced for R&D claims);
• Aligning HMRC’s revenue correction powers across the different taxes;
• Enabling HMRC to open a partial enquiry into a specific issue or section of a return; and
• A new power to issue a notice requiring a taxpayer to self-correct their return or provide an explanation as to why no amendment is required;

The consultation will run for 12 weeks from 30 October 2024 to 22 January 2025.

These reforms (if implemented) could have a significant impact on taxpayers with the introduction of additional information requirements, and the new power to issue a notice requiring a taxpayer to self-correct their return appears to be a move to add some teeth to HMRC’s recent ‘upstream’ approach to compliance of issuing ‘nudge’ or ‘one to many’ letters. The Government’s hope is that these measures could save time on both sides in dealing with enquiries and HMRC assessments.

The alignment of revenue correction powers across the taxes seems to be a sensible move and the proposed introduction of a requirement for HMRC to explain why they are making a correction and for taxpayers to provide evidence to support their rejection could avoid the need for a full enquiry.

The proposed partial enquiry power is notable as it would allow HMRC to open a partial enquiry into one aspect of a return without affecting their power to open a full enquiry or another partial enquiry at a later date (within time limits). While the partial enquiries are aimed at improving the taxpayer experience by making enquiries better targeted and more swiftly resolvable, there is a risk that this could have the opposite effect in some cases, prolonging what may have been a single enquiry into a series of enquiries.  

On a positive note for business taxpayers, there is a welcome commitment in the corporate tax roadmap to develop and consult on a new process that will give investors in major projects increased advance certainty about the tax that will apply. Advance clearances on R&D tax reliefs, which are particularly difficult to estimate with certainty in advance of a project, will also be consulted on. We can expect both of these consultations in the spring of next year. There is also a commitment in the corporate tax roadmap to improve and simplify HMRC guidance on capital allowances. These measures should go some way to helping businesses understand their tax position upfront and better inform investment decisions.

If successful we could see this approach expanded to other areas of the tax system.

We can look forward to seeing more detail on HMRC’s modernisation agenda in the spring, along with a promised raft of tax consultations. In the meantime, we encourage taxpayers to respond to the consultation on proposed new powers for HMRC and speak to your usual KPMG in the UK contact if you would like to discuss what these developments mean for you.

For further information please contact:

• Kevin Elliott
• Roisin Porter