Draft clauses for Finance Bill 2016:
Submission from HM Treasury and HM Revenue and Customs to Finance Bill Sub Committee of the House of Lords Economic Affairs Committee
February 2016
Draft clauses for Finance Bill 2016:
Submission from HM Treasury and HM Revenue and Customs to Finance Bill Sub Committee of the House of Lords Economic Affairs Committee
February 2016
Contents
Proposed changes to the taxation of savings 5
Proposed changes to the taxation of dividends 8
Customer rights and responsibilities 11
1. Draft clauses for Finance Bill 2016 were published for consultation on 9 December 2015 in line with the Government’s new approach to tax policy making (introduced in 2011). The publication includes 88 draft clauses and related schedules, along with draft explanatory notes. Draft legislation is included or measures announced earlier in 2015 and at Autumn Statement 2015. The consultation closes on 3 February.
2. Publication of draft legislation is an important way to improve tax legislation and helps ensure that when the Finance Bill is introduced in Parliament it has already had the benefit of technical consultation. It meets the Government’s commitment to publish the majority of Finance Bill clauses in draft at least three months ahead of the bill being introduced.
3. Alongside the legislation and explanatory notes, HMRC and HMT published Tax Impact and Information Notes (TIINs), which set out a range of summary impacts for each measure in line with the Government’s regulatory impact assessment guidance. Included in the impacts are impacts on individuals and households as well as impacts on business and equality impacts. The TIINs are published as part of the Overview of Legislation in Draft, which also includes information about when different tax measures will be legislated (including measures for future Finance Bills and secondary legislation).
4. The Government remains committed to a simpler and more transparent tax system.
5. The Government created the Office for Tax Simplification (OTS) in the previous Parliament to identify areas where the tax system could be simplified. At Summer Budget 2015, the Chancellor announced that the OTS would be put on a permanent, statutory footing with an expanded remit and capacity. More detail on the OTS is provided below.
6. At the 2015 Spending Review the government announced it would invest
£1.3bn to transform HMRC into one of the most digitally-advanced tax administrations in the world. On 14 December HMRC published the Making Tax Digital Roadmap, providing a high level outline of how taxpayers’ experience of dealing with HMRC will develop.
7. The Making Tax Digital vision is about much more than simply adding digital tools to the current system; it is about transforming the UK tax system into something that feels completely different and which will see the end of the Self-Assessment Tax Return as we know it. During this Parliament, HMRC will make fundamental changes
to the way the tax system works — transforming tax administration so it is more effective, more efficient and easier for taxpayers.
8. By 2020, for the vast majority, there will be no need to fill in an annual tax return; businesses and individual taxpayers will be able to register, file, pay and update their information at any time of the day or night, and at any point in the year, to suit them. Taxpayers will not have to give HMRC information that it already has, or should be able to get from elsewhere — for instance, from employers, banks,
building societies and other government departments instead HMRC will collect and process information affecting tax as close to real time as possible, to stop tax owed or repayments due from building-up. For businesses that means submitting details of income and expenditure quarterly using software or applications.
9. These reforms will transform the experience of millions of taxpayers. More detail about how these reforms will be implemented, and some aspects of their design, will be the subject of further consultation. These consultations will give stakeholders and customers the opportunity to contribute to this work and shape tax administration for a generation to come.
Proposed changes to the taxation of savings
7. Income tax is currently chargeable on most savings income, such as interest from bank or building society accounts. While a 0% starting rate for savings is available for certain lower income savers and around 23 million individuals have a tax-advantaged Individual Savings Account (ISA), most savers currently pay tax on some or all their savings income.
8. Deposit-takers (such as banks) and building societies currently deduct tax at 20% from account interest before paying it to individual account holders, under the Tax Deduction Scheme for Interest (TDSI). Individuals who are not liable to pay tax on their savings income (for example because their total income is below their tax- free Personal Allowance) can register accounts with their bank or building society for interest to be paid without tax deducted. Savers who are liable to pay tax on only some of their account interest will have tax deducted under TDSI, but can make a claim for repayment to HMRC. Individuals who are liable to pay tax on their savings income at the higher or additional rate should notify HMRC, so that they can pay the additional tax due after the TDSI deduction of 20%.
9. In May 2015, HMRC published research1 on customer awareness of how bank and building society interest is taxed. This research found that customer understanding in this area is low, and that some savers are overpaying tax because they are not aware of the account registration or reclaim process. In addition, many higher rate taxpayers are not aware of the requirement to account for additional tax, after the TDSI deduction by their bank or building society.
10. This research complements the findings of the Office of Tax Simplification2 about awareness of the starting rate for savings among pensioners, and some of the difficulties faced by some customers wishing to register their accounts for interest to be paid without tax deducted. The Low Incomes Tax Reform Group3 has also highlighted problems with the current system, including eligible savers being unable in some cases to access the information and forms they need to register their accounts, with the result that some are paying more tax on their savings income than is due.
11. 
Draft Finance Bill clauses have been published for the introduction of a new Personal Savings Allowance (PSA) from 6 April 2016. This will enable basic rate
1 ‘Awareness and Understanding of Taxation of Savings Interest (May 2015), prepared for HMRC by IFF
Research, HM Revenue and Customs Research Report 370 https://www.gov.uk/government/publications/awareness‐and‐understanding‐of‐taxation‐of‐savings‐interest 2 ‘Review of pensioners’ taxation: Final report’ (January 2013), Office of Tax Simplification https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/198500/ots_final_review_p ensioner_taxation_230113.pdf
3 ‘Banks, building societies, HMRC and their non‐taxpaying customers – a plea for better service’ (January
2013), Low Incomes Tax Reform Group of The Chartered Institute of Taxation
taxpayers to have up to £1,000 of their non-ISA savings income tax-free each year. Where an individual has any higher-rate income in the year, their PSA will be £500. Additional rate taxpayers will not qualify for the PSA. Interest and other income from Individual Savings Accounts (ISAs) will not count towards this Personal Savings Allowance.
12. Draft clauses have also been published that will remove the duty on deposit- takers and building societies to deduct tax on the account interest that they pay. Alongside these changes, the Government has announced that HMRC will introduce automated coding-out of savings income that remains liable to tax, through the PAYE system.
13. The changes will allow around 18 million savers to benefit from a tax reduction, and mean that approximately 95% of taxpayers will have no tax to pay on any savings income. They also significantly simplify the taxation of savings for most taxpayers. As a result of these changes, most savers will have no tax to pay or reclaim on their savings income.
14. Ending deduction of tax from account interest will remove the need for savers who are not liable to tax on their savings income to register their accounts for interest to be paid without tax deducted, or to reclaim amounts from HMRC. This will remove the possibility that low income savers might pay too much tax on their account interest because of a lack of awareness of the relevant tax rules or processes, or because of difficulties in registering their accounts or reclaiming sums from HMRC.
15. However around 1.4 million individuals are expected to still have some tax to pay on their savings income. These individuals will usually be additional rate taxpayers, or taxpayers with a higher than average amount of savings.
16. For many of these customers, the way in which tax due on account interest is collected will be significantly simplified. Where possible HMRC will automatically code-out tax due through the Pay-As-You-Earn (PAYE) system, using information
provided by deposit takers and building societies. This will remove the need for many customers to contact HMRC in order to pay tax due on their account interest.
17. In the small number of cases where it is not possible to collect the tax due on savings income through PAYE, HMRC will make available simple and accessible methods by which savers can settle their tax liabilities. Further details will be published in good time before any tax is due.
18. December 2015 saw the publication of the Making Tax Digital roadmap. This sets out how HMRC will go about transforming the UK tax system into something
that feels completely different and which will see the end of the Self-Assessment Tax Return as we know it.
19. HMRC has published a Tax Information and Impact Note on the changes to the taxation of savings, which can be found at https://www.gov.uk/government/publications/income-tax-personal-savings- allowance/income-tax-personal-savings-allowance. A Personal Savings Allowance factsheet is also available at https://www.gov.uk/government/publications/personal- savings-allowance-factsheet.
Proposed changes to the taxation of dividends
20. Currently, when a company distributes part of its profits to its shareholders, the distribution (most commonly a dividend) is paid with a tax credit equal to one ninth of the dividend paid. This tax credit can be set against the person’s liability to income tax on their dividend income.
21. For example, if a company pays a dividend of £90 the shareholder receives the dividend of £90 plus a tax credit of £10, giving them dividend income of £100. The shareholder can set the £10 tax credit against their tax liability on their dividend income.
22. The dividend tax credit was introduced in 1973 as part of the system of Advance Corporation Tax (ACT). Payable tax credits were abolished for pension funds and companies from 1997, and (subject to transitional arrangements) were abolished along with ACT for other taxpayers from 1999. Since then, although the non-payable credit has remained, a person cannot ask for the tax credit to be paid to them even where they do not have to pay tax on their dividend income (for example because the income is below their personal allowance).
23. HMRC frequently receive questions from people who often misunderstand the complex rules and the reason for the credit being non-payable.
24. The existence of the tax credit makes it more difficult to understand the tax rate actually payable on dividend income. The headline rates of tax on dividend income are currently 10%, 32.5% and 37.5% for basic, higher and additional rate taxpayers – but the effective tax rates (after the tax credit is accounted for) are 0%, 25% and 30.56% respectively.
25. In the 2015 Summer Budget the Chancellor announced that from 6 April 2016 the dividend tax credit will be repealed and replaced with a new tax-free dividend allowance. Draft Finance Bill clauses have been published for this announcement. The Chancellor also announced that dividend tax rates would be adjusted from April 2016. These changes follow a reduction in Corporation Tax (CT) from 28% in 2010 to 20% in 2015, and the announcement that CT rates will be further reduced to 18% by 2020.
26. The dividend allowance is a 0% rate on the first £5,000 of dividend income. Where a person has dividend income of £5,000 or less they will pay no tax on it. Dividends received above £5,000 will be taxed at the new dividend rates (7.5% for dividends in the basic rate band, 32.5% for dividends in the higher rate band and 38.1% for dividends in the additional rate band).
27. Ninety-five per cent of all taxpayers - and more than three quarters of all those who receive dividend income - will either pay less tax on their dividends as a result of these changes, or be unaffected. Around 1 million individuals will benefit from a tax reduction on their dividend income due to the dividend allowance.
28. The majority of non-taxpayers and basic rate taxpayers do not currently need to inform HM Revenue and Customs (HMRC) of their dividend income. From April 2016, individuals who receive dividends between £5,001 and £10,000, and who need to pay tax on those dividends at the basic rate, will have to inform HMRC of their dividend income for the first time. This group is estimated to be fewer than 8,500 individuals.
29. Individuals with more than £10,000 of dividend income are already required to be in Self-Assessment, and those who are not in Self-Assessment but pay tax on dividend income at the dividend higher rate already need to inform HMRC. Those with dividend income below £5,000 do not need to notify HMRC, unless they are in Self-Assessment for some other reason.
30. Around 2 million individuals are expected to have some tax to pay on their dividend income after April 2016, compared to 1.8 million if these reforms had not been put in place.
31. In most circumstances tax will be automatically coded out through the PAYE system using the information provided to HMRC by the taxpayer or included in the self-assessment return. Where dividend income between £5,001 and £10,000 is received and it is not possible to collect the tax due through PAYE, HMRC is considering a range of options to make it easier for investors to pay the tax that is due rather than through the self-assessment system. Further details will be published in good time before any tax is due.
32. HMRC has published a Tax Information and Impact Note on the changes, which can be found on the gov.uk website: https://www.gov.uk/government/publications/income-tax-changes-to-dividend-taxation
33. In March 2015 HMRC published ‘Making Tax Easier: The end of the tax return’ setting out its vision to modernise the tax system by introducing digital tax accounts for individuals and businesses. This will lead to millions of HMRC customers no longer needing to fill in tax returns.
34. Simple assessment is an early step towards this vision.
35. At the moment hundreds of thousands of people have to fill out a Self- Assessment tax return every year simply because they have a tax liability that cannot be collected through PAYE. Where we cannot collect tax via PAYE the only way for HMRC to collect the tax due in these circumstances is to require the completion of an SA Return. This is expensive and time-consuming for both the customer and the Department
36. The new simple assessment legislation will allow HMRC to send a tax calculation (along with a request for payment) to customers where HMRC already have enough information to make an accurate assessment of tax due.
37. HMRC already holds a wide range of information, such as employment income and the amount of Child Benefit paid. In addition HMRC receives information:
38. HMRC already uses the information held on its systems to calculate individual’s tax liabilities in the annual PAYE coding run. To enable HMRC to send a tax assessment to customers where tax cannot be collected via PAYE, HMRC needs new legislation, in addition to Self-Assessment which will allow HMRC to assess and collect the tax that is due.
39. Introducing the simple assessment process for customers will:
40. Simple assessment will begin in 2016/17 for people with the simplest affairs.
41. Instead of being issued a Self-Assessment tax return or a notice to file these customers will receive a simple tax calculation and a request for payment.
42. The first customers to benefit from simple assessment will be unrepresented individuals and those in lower income groups. These customers will include:
43. Calculations will be sent to customers in a rolling programme between June and October each year, starting in 2017.
44. As digital tax accounts evolve and HMRC develops its IT capability, HMRC
will use this new process to create a tax bill for customers whose tax affairs are more complex but where the information required is already known. HMRC will consult on this, as its digital plans develop.
45. The number of individuals who will benefit from simple assessment will vary from one year to another however it is estimated that up to 2 million individuals will, in time, benefit from simple assessment.
46. HMRC intends the process for customers to be on-line and as simple as possible and so has aligned the payment dates and interest provisions with those that already exist for self-assessment.
47. The current processes for hardship will continue and there will be assistance for customers who have difficulty going on-line including a paper process for customers who are unable to access digital accounts.
Customer rights and responsibilities
48. As now customers will be advised to check that the information in their simple assessment tax calculation is correct.
49. If customers think the information or calculation is wrong they will need to tell HMRC and obtain a revised tax calculation.
50. Customers will be able to challenge figures and there will be a right of appeal if disputes cannot be resolved informally.
51. Customers will still be able to fill out a Self-Assessment return if they wish. HMRC will still send a simpler assessment to individuals with straightforward affairs, but they will be able to complete a return if they want to or if they have to declare changes to their circumstances.
52. Customers will still be required to notify HMRC of new income and capital gains and simple assessment will not apply and will not be used to make estimated assessments where it is believed that a customer has deliberately not declared all their income.
53. Simple assessments will only be used to collect the tax that is due based on information about income and circumstances already known.
The Office Of Tax Simplification (OTS)
54. The OTS was established as a temporary, non-statutory office of HM Treasury in July 2010 to advise the Chancellor on delivering a simpler tax system and to provide independent advice on options for addressing existing complexity in the UK tax system.
55. At Summer Budget 2015, the Chancellor announced the Government's intention to introduce legislation to put the OTS on a permanent, statutory footing with an expanded role and capacity. This delivered on a commitment made in the Conservative Manifesto for the 2015 General Election.
56. The Government published an interim Framework Document before the summer recess in July 2015 detailing the changes it would make to strengthen the structure and operation of the OTS before legislating in Finance Bill 2016. These include a larger OTS Board and a larger secretariat to support its work.
57. The expanded OTS will advise the Government on how to move towards a modern tax system that is efficient, predictable, simple and fair. The draft Clauses 83 – 88 for the Finance Bill 2016 provide for the permanent establishment of the OTS in statute, specify its functions and make certain provisions for the governance and operation of the OTS. For example, the draft legislation provides for the OTS Board to have no more than 8 members with representatives from HM Treasury and HM Revenue and Customs. The OTS Chair will be able to nominate up to four non- Executive members.
58. The Rt. Hon. Michael Jack CBE, having served a full Parliament as Chair of the OTS, stood down last year. Following an open competition, the Chancellor appointed Angela Knight CBE to the post of Chair on 9 December 2015. The OTS also appointed David Halsey, a senior civil servant, to the post of Head of Office from 4 January 2016, to support the Chair and John Whiting OBE, the Tax Director.
59. The OTS are carrying out two reviews, on the taxation of small companies and the closer alignment of Income Tax and National Insurance contributions. These will report ahead of Budget 2016. Further OTS reviews will be announced in due course.
60. Since it was established in 2010, the OTS has made 402 recommendations to simplify the tax system, 192 of which have already been implemented or partly implemented by the Government. These include simplifying employee benefits and expenses to save employers an estimated £20 million per year in administrative costs and introducing cash basis accounting for tax. 1 million self-employed
individuals took up the cash basis in the first year alone and now no longer need to understand the tax rules designed for larger companies.
61. To guarantee the independence and strengthen the operation of the OTS, the Government has committed to legislating for the permanent establishment of the OTS in statute, and made the changes introduced in the interim Framework Document (the Government proposes to publish a final Framework Document later this year). The OTS will be able to formally respond to HMRC and HMT consultations on the implementation of its recommendations. The Government will also be required for the first time to respond formally to OTS recommendations. The draft legislation requires the OTS to publish an annual report, setting out its activities and plans.
