TaxCalc Blog

The Digital Tax Account Explained

Back in the March Budget, the Chancellor of the Exchequer, George Osborne, announced that the tax return would be replaced by a Digital Tax Account by the end of this parliament. As is often the case with Government policy, such broad statements don’t have any immediate substance to them apart from a few broad concepts.

Over the six months that have followed, HMRC have been beavering away at working out what a Digital Tax Account should look like and how it should work. We have been fortunate to be part of this and have helped to shape this development.

Bit by bit, the picture of how the Digital Tax Account will work has become increasingly more clear and now we can finally begin to explain how some of this will work.

A hoover for your taxes

I think of a Digital Tax Account as something akin to a vacuum cleaner that can suck up tax information from any source it can. Data can come in from a variety of sources, being payslips, self employment profits via bookkeeping software, rental income via property software, bank interest and so on. It’ll all be in real time too, so as soon as HMRC know about something, you’ll be able to look at an up-to-date tax position.

Some of the mechanisms for doing this are already in place. A couple of years ago, HMRC brought in RTI, for payroll which stands for Real Time Information. This was rolled out to employers and pension providers, feeding HMRC with data whenever someone is paid their salary or receives their pension.

Other mechanisms need building. This is where HMRC’s new Application Programming Interface strategy comes in. An Application Programming Interface, or API for short, allows one piece of software to talk to another piece of software.

In the case of, say, self employment income, an API would allow bookkeeping software to send monthly data to a Digital Tax Account. HMRC would then be able to compute a tax liability based upon this.

Likewise, in this new world, it would be possible to use property software or a letting agent feed the Digital Tax Account directly with land and property income and expenses.

And now for the complicated part

The trouble with the above approach is that taxes aren’t quite as simple as that – you can’t just take an accounting profit, for example, and calculate a tax liability against it. You have to refine it using the many tax rules: add backs, capital allowances, personal use restrictions, loss offsets, averaging… the list goes on.

So it would be fair to assume that any information fed to HMRC will need refining, especially when the tax year has finished and all information is known about the year.

The future for TaxCalc

Whilst it would be possible to make tax adjustments through the Digital Tax Account, so too will it be possible to do this with TaxCalc.

Another API will be developed to enable TaxCalc to download anything and everything that is held in the Digital Tax Account. This information will then be used to prepopulate SimpleStep and HMRC Forms mode (or its eventual successor when there are no official forms). From there, you can make any adjustments necessary in the usual way.

TaxCalc will therefore continue to provide its award winning software for arriving at the end result in a simple and easy fashion.

The more things change…

Of course, the HMRC strategy assumes that either you or your client wants to submit all of this information on a real-time basis. Whilst employers, pension companies and the DWP have no choice in this, taxpayers and accountants actually do.

Under current proposals, it will still be possible to have the entire tax year pass by before you need to tell HMRC anything it doesn’t know yet. As a result, things would work in pretty much the same way. Self employment, partnership income, property income and so on can all be computed after the end of the tax year and then submitted by a due date.

Furthermore, HMRC appear to be heading in a new direction whereby practitioners will not be able to use the same online services as the unrepresented taxpayers. Indeed, we've already seen the start of this with the new Company Accounts and Tax Online (CATO) service, which is only for use by the unrepresented company.

As such, despite the changes to the way tax are to be informed and assessed, there is still always going to be a need with TaxCalc.