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1. Introduction

In July 2020, the government set out a 10-year Tax Administration Strategy, the aim of which was to help create a tax system suitably flexible, responsive and resilient to the challenges and opportunities of a 21st century economy.     

A key element of this vision is the concept of ‘timely payment’, defined as bringing the calculation and payment of tax closer to the point where income or profit arises. Timely payment would harness the increasingly real-time nature of financial information relevant to tax reporting to provide customers with greater in-year certainty about their forecasted tax liability, which in turn will reduce customer payment error. Spreading out the tax payments would then help customers better manage their tax affairs, removing the need for a small number of large tax payments and consequently reducing the risk of entering debt because of an unexpected large tax bill.

HMRC offers tools and guidance to help customers with budgeting for their upcoming tax bill, such as the Budget Payment Plan. However, the delay between earning taxable income and paying the tax due on those earnings under the current ITSA system can create challenges for customers and HMRC. This can make it hard for individuals and businesses (especially new or those in lower income brackets) to budget accordingly, which can result in some having to make use of their cash reserves or borrow funds to pay taxes. Where this is not possible, customers can be pushed into a debt with HMRC.

Responses to a Call for Evidence (CfE) on timely payment, published in 2021, showed that some respondents recognised the potential benefits of timely payment, but noted that the design of such a system should be flexible enough to cater to the diversity of the ITSA population.

It is in this context that HMRC commissioned IFF Research to conduct research to inform the design of a timely payment approach to ITSA. The specific objectives were to provide insight on ITSA ³¦³Ü²õ³Ù´Ç³¾±ð°ù²õ’:

• current experience of gathering and submitting information to facilitate tax calculation and paying tax

• appetite for, and views on, options for a timely payment model (including anticipated impacts, benefits and challenges)

To meet the objectives outlined above, a mixed methods research approach was adopted. This consisted of:

• a quantitative telephone survey with a representative sample of 1,000 ITSA customers that paid income tax through Self Assessment in the year 2021 to 2022

• qualitative interviews with 40 ITSA customers, targeting those whose answers suggested they would be suited to answer questions on the specific areas of interest to the research

2. Key findings

2.1 Current experience of ITSA

The majority of participants reported they found the current process of gathering and submitting information for Income Tax Self Assessment (ITSA) easy.

More specifically, eight in ten (81%) said record keeping was easy and over two-thirds (68%) of those with direct experience of completing ITSA returns said this process was easy. Only a small minority of participants (6%) reported having difficulty with record keeping and (14%) reported having difficulty with the completion of ITSA returns.

It is worth noting that 18% of survey participants were unable to comment about the experience of completing ITSA returns as they used tax agents or accountants to do this on their behalf. This group of participants were excluded from the analysis reported.

On average 6% of participants reported facing difficulties with record keeping. Those more likely than average to report difficulties were participants aged 75 or over (11%) and those that used an agent for at least some aspects of their income tax obligations (8%). The difficulties cited typically stemmed from perceptions of it being a time intensive process and challenges with keeping track of multiple sources of income.

Overall, 14% of participants reported difficulties with the completion of ITSA returns. This was more prevalent among participants that reported difficulties with record keeping (45%) and those with 2 income streams (19%). Difficulties with the ITSA return process were often attributed to the complexity of language used on return forms and difficulties navigating the Government Gateway.

2.2 General views on timely payment

There was a broad range of views expressed around making more regular income tax payments. Almost half (49%) of participants identified potential benefits, around two-thirds (63%) identified potential challenges and roughly a third (29%) identified a mix of both benefits and challenges.

Participants aged between 18 and 44 (71%), those with a single source of income (60%) and those that received income from employment (56%) or self-employment (56%) were more likely than average (49%) to anticipate that timely payment would bring potential benefits.

The most commonly cited potential benefits were budgeting becoming easier (25%) and there being less concern about large tax bills (22%). In qualitative interviews, many participants that recognised advantages of paying tax more regularly felt that the ability to spread tax payments throughout the year would make it easier for them to plan and allocate funds for tax payments, which in turn would reduce the stress of having to make a larger lump sum payment at the end of the financial year.

Participants that identified challenges with making more regular tax payments were more likely than average (63%) to receive income from property (68%) or interest and investments (67%) and not use an agent for any aspect of their tax obligations (67%).

The most widely anticipated challenge was a potential increase in administrative burden (29%). One in eight (12%) also cited a potential negative impact on cashflow. During qualitative interviews, some participants expressed the belief that paying tax more frequently would involve them having to manually submit data with every payment, which would bring about more work in terms of record keeping and preparing and submitting returns. This perspective highlights that many participants did not have a clear understanding of how a timely payment system would work in practice, and specifically, how such a system would utilise real-time data to forecast end of year liability in-year.

Over a quarter (27%) of participants reported they would make more regular income tax payments, if given the option. This was significantly more likely among participants with a single source of income (42%) and those that received income from self-employment (33%). Participants that reported wanting to make more regular tax payments typically wanted to make monthly payments (68%), with some wanting to pay quarterly (21%). Others wanted to pay less frequently (5%) or on an ad-hoc basis (4%).

Many participants thought that a timely payment system would have no effect on their current ITSA practices. More specifically, 49% felt the ease of keeping records of income and expenses would not change, 45% felt the ease of submitting ITSA tax returns would not be affected and 38% felt the ease of paying income tax would remain the same.

However, many participants envisaged a timely payment system would affect the time associated with ITSA. Just over half (51%) expected an increase in the time spent checking the accuracy of HMRC’s calculation of how much income tax is owed, and more than two-fifths (45%) envisaged an increase in the time it takes to pay income tax through Self Assessment. Generally across almost all aspects of ITSA presented to participants, those with employment income, those with a single source of income and younger participants were more likely to believe that a timely payment system would have a positive effect on their ITSA practices. On the other hand, those with dividends, property, or pensions income, those with multiple sources of income, and older participants were more likely to think that a timely payment system would have a negative effect.

During qualitative interviews, many participants expressed an appetite for a more regular forecast of their end of year tax liability. This was typically because they felt this would provide a clearer understanding of their tax obligations, help them to plan their finances and allocate funds more effectively while reducing uncertainty and stress around end of year tax bills.

Although many participants expressed an appetite for real-time forecasting, some had reservations about the accuracy of forecasts and were concerned that it might result in them overpaying or underpaying tax. This view was particularly pronounced amongst those with incomes susceptible to fluctuation, especially those in self-employment.

2.3 Views on possible timely payment models

Three hypothetical models of timely payment were presented to research participants:

1. a system where customers must pay income tax at least quarterly, with flexibility to increase to weekly or monthly payments

2. a system where the frequency of income tax payment is determined by business or sector type

3. a system where the frequency of income tax payment is determined by the amount of income tax owed

More than half (56%) of surveyed participants felt at least one of the 3 proposed models of timely payment would be helpful. These participants were more likely to be aged between 18 and 44 (82%), have a single source of income (77%), not have vulnerable characteristics (63%), and receive income from employment (62%) or self-employment (61%). It is worth noting that, for the purposes of this study, respondents were defined as having vulnerable characteristics if they had conditions or illnesses that affect daily life, were in receipt of state benefits, owed unpaid taxes to HMRC or had limited access to digital services.

The model that was perceived to be helpful by the largest proportion of participants was a system where customers would be required to pay income tax at least quarterly (40%). This was closely followed by a system where the frequency of income tax payment is determined by the amount of income tax owed (38%). A system where the frequency of tax payment is determined by business or sector type was the model perceived to be helpful by the fewest participants (29%).

Reflecting the findings in relation to the concept of timely payments in general, the most widely perceived advantage of all 3 models was it being easier to budget. The avoidance of large tax bills at the end of the financial year, it being easier to calculate income and expenses, and greater control and transparency were also prominent themes.

Meanwhile, the most widely perceived disadvantage of all 3 models was an increase in administrative burden (ranging from 14% for a system where the frequency of tax payment is determined by business or sector type to 21% for the other 2 models). Other prominent perceived disadvantages were a negative impact on cashflow (21%), an increased chance of error (6%) and making the payment of tax more complicated (3%).

Nearing half (47%) of participants that identified a model of timely payment as potentially helpful said, if it was introduced, they would be likely to opt into this model voluntarily, including 21% that said this was very likely. This equates to a quarter (25%) of all surveyed participants. The model where customers would pay at least quarterly exhibited the highest potential opt in rate (62% of those that considered the system most helpful said they would be likely to opt into this model, which equates to 16% of all participants).

Amongst the survey participants that said they would be likely to opt into a model of timely payments, almost all identified at least one form of support that would be required to aid their transition to a new ITSA payment system (96%). The most commonly mentioned form of support was a dedicated telephone helpline (80%), closely followed by guidance documents (77%). Webinars were mentioned by more than half of participants (54%) and two-fifths suggested a phased introduction of a timely payment model (39%).

Almost two-fifths (38%) of participants that identified a model of timely payment as potentially helpful said they were unlikely to opt into this model voluntarily. Of these, around a third (30%) said nothing would motivate them to do so. During qualitative interviews, these participants typically explained that they were content with the current ITSA system and, while they recognised some possible advantages of the hypothetical models, they did not think these advantages would outweigh those of the existing system and were often wary of change, feeling that they had a sense of familiarity with the current system that they did not want to lose.

All survey participants were segmented into groups based on their current experience of gathering and submitting information for ITSA and whether they would opt into one of the 3 hypothetical models of timely payment:

• more than three-fifths (62%) reported no difficulties with the current system and were not interested in opting into any of the proposed models

• a fifth (20%) had no difficulties with the current system but would be interested in opting in

• around one in ten (11%) had difficulties and would not opt in.

• around one in twenty (4%) had difficulties and would opt in

• a small proportion (3%) could not be classified as one of these 4 groups

3. Summary and Recommendations

In summary, more than a quarter (27%) of research participants reported they would make more regular tax payments if given the option and a quarter (25%) said they would voluntarily opt into one of the 3 hypothetical models of timely payment if introduced.

However, most participants (62%) reported having no difficulties with the current ITSA system and said they would not be willing to opt into any model of timely payment. Many believed that more regular tax payments would bring about challenges, particularly increased administrative burdens and a negative impact on cash flow. Meanwhile, some had reservations about the accuracy of estimated tax liabilities under a timely payment system.

Reluctance to engage with the concept of timely payment was partly a consequence of participants being confident and accustomed to the existing system. However, there was also evidence to suggest that many participants did not have a clear understanding of how a timely payment system would work in practice, and specifically, how such a system would utilise real-time data.

In light of these findings, IFF recommend that HMRC take the following actions if any model of timely payment is introduced.

3.1 Promote the benefits of timely payment

In advance of the introduction of any model of timely payment, ITSA customers need to be provided with communications that:

• explain and demonstrate how a timely payment approach would work in practice, both regarding the process and outcome (especially in relation to the use of real-time data and forecasting)

• present the benefits of timely payment for customers in comparison with the existing ITSA system

• address commonly expressed concerns (such as the potential for inaccurate forecasting and increased administrative burden)

3.2 Implement a phased approach and further testing

It is recommended that HMRC explore methods of gradual implementation. This could be achieved through the deployment of a proof of concept, where any model of timely payment is tested amongst a sub-set of ITSA customers. The findings from a proof of concept could be used to promote the benefits of timely payment to the wider population of ITSA customers and to inform improvements and refinements.

3.3 Ensure clear guidance and support mechanisms are in place

If any model of timely payment is implemented in the future, ITSA customers will require guidance and support to assist them with the transition. Various resources should be developed. Informed by the findings from this research, these resources could include:

• a dedicated telephone helpline to enable customers to seek personalised assistance for specific queries and concerns

• ÒÁÈËÖ±²¥ guidance pages to offer self help resources and step-by-step instructions

• webinars to further facilitate customer understanding, addressing common challenges and sharing best practices