Speech by Exchequer Secretary to the Treasury, David Gauke MP: taxation for the 21st Century
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Speech by Exchequer Secretary to the Treasury.
I was delighted to receive an invitation to make the keynote speech here today, at this - CIPP’s Annual Payroll and Pensions Conference and Exhibition. Celtic Manor played host to one of the great European Ryder Cup triumphs in 2010. And given Sunday evening’s extraordinary efforts over the USA in Medinah, it seems apt to be here. Excitement, drama, triumph and despair - and unlikely comebacks. We all knew dealing with the tax system can be like that - but now we know that those words can apply to golf too.
It is also apt that I give this speech at CIPP’s annual conference. I have enjoyed very constructive engagement with CIPP, both during my time in opposition and in government, across both policy and operational matters.
And I am pleased to be able to draw attention to an excellent new CIPP initiative here today. Next week CIPP will announce their new national apprenticeship initiative, in conjunction with the Department for Business, Innovation and Skills. The scheme will create up to 600 skilled jobs helping to address the lack of trained resource in financial administration in small and medium sized enterprises. I see this as an excellent example of how short-term Government seed-corn investment, alongside business, can lever a sustained increase in employer investment in skills, to ultimately support growth.
Before turning to the key matters I want to address, forgive me if I take you back to when I first started work for a major City law firm, as a trainee solicitor in 1995. Fee earners did not have their own computers. Communication was through letter, fax or occasionally telex. If you needed to be contacted when out of the office, you could book out the firm’s mobile telephone.
I raise these points not as a nostalgic look back at a more peaceful age, but to highlight how much the world has changed in the last 18 years. Despite the Treasury’s well documented tight-fistedness, I not only have access to the internet, but I don’t need to dial in for it.
But until fairly recently, the world of tax was behind the times. In 2005, most of us were already paying our utilities online, but three quarters of those filling in self assessment forms did so by post.
While my search engine seems to know to offer me discounted tickets to see Ipswich Town FC play at home - we have until recently failed to make use of the technology available to make life as easy as possible for taxpayers.
Of course paying tax is rarely going to be as popular an exercise as buying football tickets - even for an Ipswich match. But in many ways, that makes it even more important to make the process as painless as possible.
Regardless of our opinion on tax, it affects us all and is intensely personal. But much of our experience is framed by the method and manner in which it is collected.
And I believe the extent to which technology can improve that process is limited only by our imagination and initiative.
So I want to talk to you today about how we are using technology to improve the taxpayer experience.
To reduce burdens on households and businesses; to improve transparency; to allow taxpayers to take responsibility for their tax affairs; to help HMRC exercise a fair and efficient approach to tax administration, and to help the public hold government to account for the way it raises and spends their money.
To modernise the tax system has been our goal since my party was in opposition. In my role as a Shadow Treasury minister, I was struck by how cumbersome the Pay as You Earn system was. David Freud, advising us on welfare reform, was concerned that in order to move to a universal credit system, we needed earnings information in real time. So for some time, we worked together to find a way to reform radically how PAYE worked.
Since coming into office, we have already made substantial progress to improve the personal tax system, and in particular PAYE, which for too long had been neglected.
HMRC’s new computer system holds all a customer’s PAYE records in one place, for all their employments and pensions. That new system is now delivering much better accuracy and efficiency.
It allows HMRC, for the first time, to see the full tax position of callers to their contact centres as soon as they get in touch - helping HMRC provide a better service.
Through using the new technology, great progress has been made clearing old backlogs - HMRC are over 97 per cent through the legacy cases (those prior to 2007-08) and will clear these by December this year. They are aiming to be completely up to date on later tax years (2008-09 to 2011-12) by April - ready to start 2013/14 with PAYE in the best shape for many years.
And we are making further investment in Real Time Information - a system that will bring PAYE into the 21st century by allowing HMRC to receive information on employees’ earnings, tax, and National Insurance Contributions as they are paid, rather than at the end of the year.
RTI is the single biggest innovation in the administration of the tax system since PAYE was brought in after the Second World War.
It will make it easier for employers to administer PAYE and will make tax more accurate.
RTI integrates PAYE reporting with normal business practices; enables employers to provide information more frequently; in time it will let more issues be resolved in-year; and makes it is easier to adjust when employees leave or join within the tax year. The majority of the pilot employers questioned expect a reduced burden when end of year is taken into account. And they have told HMRC they see clear advantages in increased accuracy and simplicity - especially around starters and leavers.
And I’m pleased to say CIPP have also been hard at work making the lives of employers easier. Their new Payroll Assurance Scheme should help employers ensure their payroll returns are accurate and complete. I wholeheartedly welcome initiatives of this kind in supporting employers, and by extension HMRC, in the payroll process.
In steady state, we expect our new RTI system to save employers around £300 million net per year in admin costs alone. And we also expect reductions in tax credit error and fraud of £300m.
As a consequence the system is expected to pay for itself within a year.
RTI will also provide a key building block for our reform of the welfare system - which will make sure that work always pays, and is seen to pay.
It will ensure DWP have up-to-date information about employment and pension income, so that Universal Credit awards can be assessed dynamically, without people needing to send information about their pension or employment income.
DWP and HMRC have been working closely to make sure the two projects are appropriately joined up. And that the necessary technology to support RTI for Universal Credit will be in place this month - ready for DWP to use from October 2013.
As you will know, we’ve been piloting the RTI scheme since April, and a couple of months ago I travelled to Solihull to make CIPP’s first RTI submission as they joined.
That provided an excellent photo opportunity of the back of my head as I clicked a mouse button - not quite awarding medals at the Paralympics, but at least I got a small cheer….
From next month, large employers will be able to join the RTI pilot or expand existing involvement, and I would encourage all who have not signed up to investigate the requirements and consider joining as soon as possible - the benefit of doing so cannot be overstated.
From the start of our pilot in April, with just 10 employers, we now have over 1600 PAYE schemes in the pilot - exceeding the target for September by over 15 per cent, and with over 1.9 million individual records sent through the system.
And I am pleased I can say that we have received strikingly positive feedback from the pilot employers. It’s not always the case that the words ‘very easy’ are used to describe an HMRC initiative. And it’s even less often that a tax administration reform is described as ‘pretty cool’ - to quote one Twitter user…
But this reflects the work they have been doing with stakeholders and customers - to ensure that RTI works for them.
The achievement is all the more encouraging given the additional impressive work on data quality taking place, which will ensure HMRC sustains the success as the pilot scales up.
Most employers will begin reporting PAYE in real time in April 2013. All employers will be routinely reporting PAYE in real time by October 2013, in time for the introduction of Universal Credit.
Modernising the personal tax system
But this is only a start of our reforms to bring the Personal Tax system into the 21st Century.
In November last year, HMRC published two discussion documents that took our vision further. They presented our plans for the future, and gave a taste of our ambition.
They spelled out our ambition - to deliver a personal tax system that is more transparent and easier to use for the individual taxpayer.
We want to increase awareness and accountability, making it easier for individuals to know what they have paid, what their overall tax rate is, how it has been calculated and when and why they should interact with HMRC.
While this will not happen overnight, we have started the debate. And we want to engage with individual tax payers to understand whether, what, and how they want to see information on their tax affairs.
For many, the details of tax are difficult to understand, detached from everyday life, a black box of rates, thresholds and reliefs.
They trust their employers and PAYE to get it right for them, and do not understand the system’s limitations and what can go wrong.
It is little wonder that taxpayers find it difficult to work out exactly how much of every pound they earn they get to keep.
The fact that tax is necessary - to support critical public services - should not give Governments carte blanche to take as much as they can get away with.
Governments need to be accountable for what they raise, how they raise it, and how it is spent. And for that to happen, people need to be in a position to understand what they pay and why.
If I were to summarise Government’s vision for tax it would be transparency, simplicity and efficiency.
And in order to deliver that, I have been clear that I want nothing less than to transform the UK Personal Tax system fundamentally to deliver a better experience, and a more transparent approach for the taxpaying public.
Examples of recent achievements
Other countries are already taking decisive steps to help their citizens engage in their tax affairs. And the evidence shows that allowing customers to view and transact with their own tax leads to greater awareness and understanding.
One idea would be for full online personal tax accounts.
Accounts that would allow those who pay tax via PAYE to access their records online, as is already the case for those who declare liabilities through the self assessment process;
That would allow people easily to check and alter their address details at the click of a button;
That would allow HMRC to correspond with millions of taxpayers at minimal cost through a mailbox system;
That would allow people to manage their tax themselves; see their tax rates; and see how those compare to previous years;
And that would allow employers to do the same.
Ultimately, you could access your online account through your phone - “Putting tax back into your pocket” so to speak…
My gas company has been doing this for years - and perhaps it’s time for HMRC to be in the same position.
Personal tax accounts could be something for the future. A lot of thinking would be needed on how they might best work for the taxpayer. But in the meantime, we have already taken steps to improve transparency.
At Budget this last year we announced that HMRC would introduce a personal tax calculator by April 2012 so that individuals can work out how much tax and NI they may expect to pay, and what their effective tax rate is.
That has been delivered and the mobile app version was downloaded 34,668 times in the first 24 hours, and now has around 220,000 downloads - the Guardian made it ‘app of the week’ and it was the second most downloaded free app in Apple’s online iTunes store.
At the last Budget, we announced we would take this further - with tax statements for 20 million customers every year from 2014/15.
But as well as informing individuals on their tax affairs, it will also make it easier to provide up to date information to HMRC.
Helping increase accuracy, reduce burdens on business, prevent fraud and error, and reduce costs to the Exchequer.
We’re also doing work to help out business. Our new online ‘Business Tax Dashboard’ for example allows businesses to see how much tax they have already paid and how much they still owe. Just one of a number of measures that has led to reduced admin burdens for business up and down the UK.
And these are just some of the ideas we’ve had. I want businesses, individuals, and representative bodies like CIPP to come forward with how we can improve tax transparency further.
Part of that process involves removing misleading elements of the tax system. While the headline standard rate of tax declined between 1980 and 2010, the level of direct personal tax has remained roughly the same. That is because National Insurance - a tax on income, if not strictly speaking income tax - increased.
Jean Baptiste Colbert, the Minister of Finance under King Louis XIV famously said that ‘The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”
That certainly seems to have been the approach taken in the recent past, with a persistent policy of keeping tax and National Insurance separate, even though for most intents and purposes, they fall on the same base and go to the same place - the Exchequer. That allowed the previous government to keep headline income tax rates low, despite raising taxes on income.
But I believe people should know how many feathers have been plucked. That is my motivation for tax transparency, and underpins our approach to Income Tax and NICs integration.
As many of you are aware, at Budget 2011 we said we would look at how best to bring together the operation of income tax and National Insurance contributions.
In doing so, our aim is make the tax system more transparent, and also less burdensome. Over the past 18 months we have had excellent engagement with organisations such as CIPP to work through the detail. Operational integration is not straightforward, we knew that when we started. But by working in partnership with organisations such as CIPP we can work through those issues to identify what more we can do to simplify the system for employers and employees. This collaborative approach is essential in such a highly complex area where the potential impacts on employers are significant. It is crucial that major reforms are well thought through rather than rushed.
We also need to consider the impact on the individual as well as business. As set out in the Government’s 2011 publication, “integrating the operation of income tax and National Insurance: next steps” any reforms that make NICs match income tax structure could mean that a significant number of individuals would end up with a different NICs liability. Some could pay more and others less. Therefore before proceeding with any reform, it is our responsibility to ensure we have a clear understanding of the number of individuals likely to be affected and how they will be affected.
I encourage businesses and representative bodies like yours to continue to engage with us on this and other reforms - as I am grateful to you for doing thus far. I hope to be in a position to provide an update on this detailed programme of work shortly.
The ideas of this Government - and the ideas that we are taking on board from taxpayers and their representatives - offer to use technology to transform the way that tax operates.
Ideas that will make it easier for HMRC to keep information up to date and for taxpayers to provide it.
Ideas that will lead to greater individual understanding of and engagement in their tax affairs.
Ideas that could make the administration of the personal tax system easier for employers and fairer for individuals.
Ideas that will increase accuracy, reduce burdens, and cut costs.
Ideas that will benefit the administration of the tax system, but also taxpayers, and - perhaps most importantly - the debate surrounding what we pay and how we pay it.