Potential self-assessment changes for the self-employed and landlords

The Government is seeking views on how and when taxpayers with new sources of self-employment or property income should start to interact with the tax system and whether current processes can be updated to provide a better experience for individuals and businesses.

Income Tax Self Assessment (ITSA) is the system HMRC uses to collect income tax, Class 2 and 4 National Insurance and capital gains tax, where tax has not been deducted automatically from wages, pensions and savings. It is also used by individuals who need to claim a tax relief or allowance and companies making claims outside their company tax returns.

The Government is seeking evidence on ITSA registration to understand whether bringing forward the point at which the newly self-employed and landlords are required to identify themselves to HMRC would help achieve its goal of making tax “easy to get right and hard to get wrong”. Related improvements to registration more broadly are also being considered.

This call for evidence includes the following helpful diagram illustrating current taxpayer journeys for the newly self-employed and landlords:

Chapter 3 of the document sets out the challenges presented by the current registration system. And Chapter 4 makes the following comments and proposals for change:

• The current deadline of six months from the end of the tax year in which the taxpayer becomes liable could be reduced to, say, two, three or four months.
• As now, taxpayers would need to start to interact with HMRC only when they knew they had taxable income. But retaining the link with the tax year would mean perpetuating the inconsistency of tax obligations starting, depending on the point in the tax year the business starts. HMRC would still not know about many new businesses for over a year A new obligation could replace the current obligation to notify liability, removing the link to the tax year and the anomaly it creates.
• For individuals new to ITSA, there could be an obligation to register for ITSA at a specified period after the start of the new self-employment or property income.
• For taxpayers already within ITSA, there could be a new obligation to tell HMRC about the new self-employment or property income, again at a specified period after it starts.
• Filing and payment obligations could remain the same.
• This would achieve consistency for all taxpayers on when the obligation is triggered, which might be simpler for them to understand and for their agents to explain. The obligation could be brought much closer to the date the self-employment or property income commences. HMRC would have much more up to date information about the population.
• There could be a risk of deadweight costs from bringing into ITSA businesses that never become profitable. If the obligation is triggered too early, taxpayers may have difficulty identifying whether and when they started trading. Sanctions and safeguards would need to be carefully considered so they are proportionate and effective.
• Alternatively, the obligation could be triggered when a set turnover threshold was met, for example £1,000 to align with the trading allowance.
• HMRC could explore ways to use third party data to identify people who have recently started in business, making them aware of the need to register if they have not yet done so. Better use could be made of self-employment “touchpoints” as conduits for information about tax obligations.
• A newly self-employed taxpayer may be applying for business rates, getting a business bank account or applying for licences or safety certificates. A new landlord may be applying for buy-to-let mortgages or getting an insurance policy.
• This could also be about leveraging the role of intermediaries so that agencies and agents taking on new clients play a more active role in the tax registration process.
• There should be efficiencies from tapping into existing information in this way: taxpayers would learn about their tax obligations as they go about setting up a new business. This could help minimise the burdens on taxpayers and help them understand their entitlement to reliefs and allowances. HMRC would gain more up to date information about the population.
• Encouraging the adoption of digital record keeping could integrate tax reporting with the way that taxpayers run their business from the outset. There may be opportunities for software and app providers to build tax registration into their products. HMRC could explore using this information for automation and pre-population.
• The development of the Single Customer Account may provide a route for taxpayers to register and to help them become aware of their new tax obligations. It could provide timely messages about other obligations and deadlines they will encounter in connection with their new business.
• HMRC could also signpost new business taxpayers to help from other government departments, like how to access any regional or sector specific grants available.
• Coverage could be patchy because not all businesses navigate the same touchpoints. HMRC would need to explore the extent to which intermediaries have an interest and the capacity to play a role in registration. Taxpayers’ data would of course need to be protected.

The call for evidence asks the following 12 questions:

• Question 1 – How simple and well understood are the current legislation and processes for notifying liability and registering for ITSA? What are the benefits and/or drawbacks of the current system?
• Question 2 – If you have experienced registration processes across different UK taxes or internationally please tell us more about how they compare. What works well and what could be better?
• Question 3 – What are your experiences of closing an ITSA record of self-employment or property income? Is it easy to understand and complete?
• Question 4 – What difficulties do taxpayers new to ITSA face in complying with their obligation to notify liability? What are the causes of these issues?
• Question 5 – How do customers new to self-employment or property income learn about the ITSA registration process and associated tax obligations? What are the issues with this?
• Question 6– What challenges do taxpayers experience as a result of the delay between a business starting and the deadline for notification?
• Question 7 – Are taxpayers clear on what trading is, and when they started or stopped trading? What factors about trading make it difficult to decide whether or not to register?
• Question 8 – What are taxpayers’ experiences of interacting with different government departments when starting self-employment?
• Question 9 – Do you agree that chapter 3 sets out the challenges presented by the current registration system? Are there others?
• Question 10 – Are these the right options for changing the obligation? Which is better? Are there others?
• Question 11 – What is the right period after the start of the new self-employment or property income for the obligation to be triggered?
• Question 12 – Do these ideas for using intermediaries and third party data to improve tax registration merit further exploration? Are there others?

The deadline for responses is 11:45pm on 22 February 2022.

Next steps

If the responses indicate an appetite to reform the ITSA registration process for the self-employed and landlords, HMRC will publish a consultation in 2022. The earliest implementation date for any change would be April 2024.

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Sources: Techlink