Future of Finance

Featuring Future of Tax and Future of Fintech

“From April 2026, anyone with a gross income from self-employment and property over £50,000 will need to use MTD for Income Tax.”

Craig Ogilvie, Director of Making Tax Digital, HM Revenue and Customs Page 02

“PSR rules reduced claim resolution times from up to two years to ﬁve days.”

George Iddenden, Journalist, The Payments Association Page 06

Digital tax for self-employed and landlords

We are embarking on a digital transformation aimed at modernising the UK’s tax system. This will reduce the potential for error and support business productivity and growth.

Making Tax Digital (MTD) for Income Tax will make it easier for self-employed people and landlords to manage their tax, enabling businesses to take another step towards getting their tax aﬀairs online. We’ve designed the new system around keeping digital records and using compatible software, which will make it easier for customers to get their tax right.

What’s changing with MTD for Income Tax?

MTD for Income Tax means self-employed people and landlords will need to keep digital records of their income and outgoings. They will submit quarterly updates to HMRC using compatible software – which will do much of the ‘heavy lifting.’ Regularly updating records and making full use of software features (such as helpful prompts) will reduce the chance of errors, meaning less time spent trying to put things right.

From April 2026, anyone with a gross income from selfemployment and property over £50,000 will need to use MTD for Income Tax. Those with an income over £30,000 will need to do this from April 2027. The threshold for using MTD for Income Tax will eventually decrease to £20,000; the timing for this will be conﬁrmed at a later date.

Beneﬁts of taking part now

Most people who need to submit an annual Self Assessment tax return already do so online. Using MTD-compatible software will make this easier, as the information recorded in quarterly updates can be used to complete it. The software will also retrieve details of income from some sources already reported to HMRC and pre-populate it in the tax return. For example, income from PAYE employment or a pension. The software will also capture any student loan deductions. We’re fully testing the MTD for Income Tax service with volunteers to make sure it meets the needs of all users. This helps us improve the service and allows users to get started and help shape it. Taking part in our testing programme now will also give customers and their agents more time to familiarise themselves with the new process before it becomes mandatory next year. Go to GOV.UK for more information on how to join.

Keep your business healthy by planning for tax changes

There are two certainties in life: death and taxes. Both are inevitable, but at least with tax planning, the key dates and deadlines are very clear.

With new legislation, such as Making Tax Digital for Income Tax (MDT IT), the mandatory ﬁling requirements are causing accountants and bookkeepers to change how they approach their dayto-day work. The question has now shifted from ‘why tech?’ to ‘which tech?’

AI bookkeeping automation

By employing bookkeeping automation, you can save time on your accounting processes by using AI to extract data from key documents, receipts and invoices. With accurate and up-to-date

data, the reports you generate can be trusted to provide meaningful insights, giving you a clear view of your business’s ﬁ nancial health. Without this accuracy, any insights gained could be misleading.

Scenario planning for taxation

Understanding the impact of budget changes is crucial for your business. That’s what makes scenario planning such a valuable tool. It enables you to forecast how upcoming changes might aﬀect your business, so you can adapt with conﬁdence — armed with real-time data.

MTD IT is not the only change we foresee in the tax space, although

it is arguably one of the largest. Only 44% of accountants admit that they feel prepared for MTD IT, leaving the majority to fear the upcoming changes. Additionally, the Government’s budgetary amends such as National Insurance changes and other tax increases also have a knock-on eﬀect on accountants and bookkeepers and the businesses they serve. When the country’s budget changes, so does a business’s budget.

Financial automation for resilience

Many other changes are coming soon, but there are already things that you could be doing to get ahead of them. One would be to implement a tool like Dext to get a better picture of your client’s ﬁnancials. It can automate some of the routine tasks that eat up your time, and then give you insights that you can act on, with complete reassurance that the data is 99% accurate.

Unforeseen tax changes shouldn’t spell the death of a growing business. By making the right moves at the right time to future-proof a business with the power of financial automation, you can stay ahead of changes, minimise surprises and plan for cash flow challenges with confidence. The people behind the numbers can then have a healthy work-life balance, too.

Time for a devolution dividend: strengthening the local tax base can boost UK growth

Growth has been weak since the global ﬁnancial crisis, and public services have been stretched thin. Part of the solution to this bind may lie in reforming local taxes.

Across the OECD, subnational governments power growth. They are responsible for over 50% of total public investment and hold key levers over housing, transport, planning and economic development.1 Yet, in the UK, local governments have few incentives to use these powers in pursuit of growth. New business and housing developments add costs for local authorities. Meanwhile, few of the proceeds of growth are retained locally.

Few incentives for growth

Local taxes only account for 19% of total local government revenue in the UK, signiﬁcantly lower than the OECD unitary country average of 33.6%.1 Instead, the UK’s local authorities are heavily dependent on central government grants and subsidies. Worse, local tax revenues they do retain are reliant on a small number of property taxes only indirectly linked to growth.

Broadening the local tax base would sharpen incentives for local authorities to invest in (and permit) growth. It could also help strengthen local public ﬁnances at a time when it is needed most. Recent price rises and service demands, alongside higher interest rates, are adding to the burden of servicing local debt which has grown by nearly 50% between 2014–23.2

Local government initiatives

It could also improve local government accountability and

innovation. Local governments with control over their own revenues are often more responsive to their communities’ needs and better equipped to address them.3

In Sweden and Finland, where municipalities self-fund a signiﬁcant share of their expenditure, innovation in social care and environmental services has been notable. Switzerland oﬀers an even bolder template for reform, where 60.5% of local government revenues are raised locally through progressive income taxes, with freedom for municipalities to choose tax rate levels.4

Limits and maintaining balance

Of course, there are limits. Strong economic hubs like London would generate higher tax returns than less affluent areas, posing a threat to efforts to narrow the gap between regions. To mitigate this, the core of existing fiscal equalisation mechanisms should be retained alongside — rather than be replaced by — new powers to raise revenues and continued efforts to improve local fi nancial skills and capacity.

WRITTEN BY Paul Lodder VP, Accounting Product Strategy, Dext

A reﬂection on 20 years of HMRC customer service

April will mark 20 years since HMRC was formed by the merger of HM Customs and Excise (C&E) and the Inland Revenue (IR).

Iworked in C&E at Thomas Paine House (TPH) in Angel, London, at the time. TPH, like hundreds of other premises, is no longer a tax oﬃce. Many of those around at the time may look back misty-eyed to the ‘good old days’ of local tax oﬃces that you could visit for help, when agents knew their local tax inspectors by name.

Persistent HMRC challenges

The move to regional centres, increased digitalisation and growing complexity, have increasingly put pressure on HMRC. However, customer service challenges are not a new phenomenon. Five years post-merger, customer service slumped with HMRC handling just 48% of calls, largely due to problems implementing the National Insurance and PAYE Service.1 Ten years post-merger, post was the problem, with just 52% being turned around within 15 days.2

Our customer service study

Our members continued to tell us (see CIOT survey into HMRC’s service levels, 2023) that good HMRC customer service is critical to tax compliance, the ability to do business and trust in the tax system. This led to the Chartered Institute of Taxation (CIOT) joining forces with ICAEW in 2024 to consider how to address HMRC’s customer service challenges (see our full report: ‘Tackling

Why UK startups are turning to EIS for growth and investment in 2025

The Enterprise Investment Scheme (EIS) supports UK economic growth by encouraging investment in startups and SMEs through tax reliefs, boosting innovation and business expansion.

Young startups with little to no trading history face high risks, making traditional ﬁnancing diﬃcult. Private investors often demand excessive equity, making investment costly. The EIS mitigates this risk with generous tax reliefs, encouraging investment. Economically, it drives innovation, attracts businesses to the UK and fuels growth and job creation.

How does EIS work?

There are several conditions a company must meet to qualify for the scheme; none are too onerous, and HMRC has an advance assurance process to provide comfort that

HMRC’s customer service challenge’). We analysed the experiences of 31 ﬁrms from 634 telephone or webchat interactions with HMRC leading to 10 recommendations for change,3 based on three themes:

1. The ability to track queries and correspondence: thus eliminating the need to phone HMRC to conﬁ rm safe receipt and track progress (which represented over one-third of the calls recorded), and escalate and resolve complex cases eﬀectively.

2. Improving the quality of service provided by HMRC: ensuring HMRC staﬀ take ownership of work, are equipped with the right knowledge and tools to resolve matters and ensure HMRC are resourced adequately.

3. Capitalising on good digitalisation: plugging gaps where digital systems and communications don’t exist or work properly, co-create new digital systems in conjunction with their users and maintain the functionality of legacy systems in the meantime.

Perhaps in another 20 years, if these recommendations are implemented, HMRC customer service issues may be a thing of the past.

References

a company qualiﬁes, prior to investment.

Primarily, the company needs to have been trading for less than seven years, not within an excluded activity (such as ﬁnance or property development) and have long-term plans to grow and develop the business. To ensure the relief is targeted correctly at companies with long-term growth in mind, the shares must be held, and the company conditions maintained for a three-year period.

If shares are held and remain qualifying, investors can beneﬁt from a raft of tax reliefs. The 30% Income Tax relief on investments

up to £1 million a year (£2 million for knowledge-intensive companies) immediately reduces the upfront investment.

CGT deferral and protection

There’s also the opportunity to defer Capital Gains Tax (CGT) on a realised gain by reinvesting that money into EIS shares. The gain comes back into charge when the EIS shares are sold, but nothing is stopping you from reinvesting the gain again and again. Finally, further relief is also available at an exit or disposal.

If the investment does well, any gain is exempt from CGT, protecting investments from the increased CGT rate and any further CGT increases.

Importantly, given the high-risk nature of EIS investments, EIS offers benefits should the shares fall to zero or be sold for less than the original investment. EIS loss relief allows the investor to offset that net loss (investment minus tax relief claimed) against either their income tax or CGT bill, whichever is preferable.

Are EIS investments right for you?

Despite all these beneﬁts, EIS remains an underutilised scheme, perhaps due to its inherently high-risk nature. While you cannot invest in your own company, you can invest in friend’s and (some) family companies. If you are a sophisticated investor, consider talking to your ﬁnancial advisor to see if EIS investments are right for you.

HM Revenue & Customs. 2011. Annual Report and Accounts 2010-11.

2. HM Revenue & Customs. 2016. Annual Report and Accounts 2015-16.

CIOT and ICEAW report, 2024, Tackling HMRC’s customer service challenge.

WRITTEN BY Adam Chick

WRITTEN BY Richard Wild

Getting small businesses ready for the digital tax era

Experts are warning small businesses and sole traders to begin making the transition to digital tax submissions as HMRC prepares to implement sweeping changes.

While making the digital switch may seem a daunting step for small businesses, sole traders and landlords, it is the way HMRC wants businesses to deliver their accounts going forward. Experts are urging businesses to act now as they risk ﬁnes and being left behind by their competitors.

Test tax solutions and systems

Tax expert Stuart Miller explains that Making Tax Digital for Income Tax (MTD for IT) legislation goes live from April 2026, with the ﬁrst tranche impacting sole traders and landlords who have a total income exceeding £50,000. That threshold falls to £30,000 from April 2027 and £20,000 at a date yet to be conﬁrmed.

With up to 3 million businesses aﬀected in the next four years, Miller encourages small businesses to speak to their accountants, bookkeepers and advisors as soon as possible. “The digital transition will be daunting for businesses, especially in a tough economic climate,” he adds. “So, start now and see the next ﬁnancial year as a ‘dummy run’ to test solutions and systems.”

The incoming MTD for IT regulations says all transactional data for receipts and invoices must be kept in a digital format. Small businesses must provide quarterly updates on income and outgoings to HMRC, which will then deliver a tax estimate for year-end ﬁling of accounts.

Platform oﬀers eﬃciency gains

Xero is a small business accounting platform, offering bookkeeping and payment solutions to over a million subscribers in the UK. Businesses impacted by MTD for IT need to be aware of their responsibilities. Miller says: “The most interesting aspect of MTD for IT is the potential efficiency gains and streamlining of processes and operational benefits these businesses get.”

Research by Xero indicates that, on average, small businesses (one to nine employees) use 4.7 digital tools, but 42% do not use ﬁnance or accounting tools at all. The report further suggests that digital-led habits will enable clear, transparent and regular

reporting to support better business decisions and

reporting to support better business decisions and eﬃciency gains.

Easy-to-onboard digital tools

Figures additionally show that 84% of small businesses believe digital tools have delivered operational benefits, and 71% note at least one financial and communication benefit. Digital records also spread business admin across the year and deliver an opportunity for small businesses, accountants and bookkeepers to work together on tax and other advisory support, such as with growth strategies or long-term planning.

“There is no denying it will be legwork for businesses to move onto digital tools; that is why software needs to be simple to onboard,” continues Miller. “But the beneﬁt of having real-time digital information is what should make MTD for IT a good driver for small business growth.”

Choosing the correct software

Software should be reliable, cost-effective, eradicate human error, have inbuilt prompts such as flagging up VAT thresholds, streamline processes and deliver a better understanding of cash flow. Such real-time data is also invaluable for businesses that can get a better understanding of their financial health and insights that support scenario planning. It can also help those seeking additional funding. However, businesses should research to ensure the software meets their needs.

HMRC has a web page on currently available MTD software, and Xero also has 24/7 online support. It is also the ﬁrst major software vendor to pass the HMRC testing phase in June 2022. It oﬀers software supporting non-VAT registered businesses to complete their MTD journey, streamline bank reconciliation, auto-detect transactions and scan receipts using a smartphone.

“What we really want,” says Miller, “is for those digital tools to supercharge businesses to give them real eﬃciency and beneﬁts and free up time for people to do more of the things they love, rather than books and records.”

INTERVIEW WITH Stuart Miller Director, Product Compliance and Industry Engagement, Xero

WRITTEN BY Mark Nicholls

Why 2025 is a critical year for UK ﬁntech leadership

This year is shaping up to be a critical year for both UK and global ﬁntech, as we face an ever-evolving landscape of geopolitical, regulatory and technological changes.

With these ﬁntech shifts come new challenges, but also huge opportunities to accelerate the growth of the sector. If the UK is to maintain its international leadership in ﬁnancial innovation however, we must act quickly and decisively on progressing a number of key areas.

UK ﬁntech leadership challenge

The UK remains the second-largest fi ntech hub globally, following only the United States, and is the undisputed leader in Europe.1 However, as highlighted in Innovate Finance’s recently released FinTech Investment Landscape 2024, other hubs around the world are catching up fast. Countries are investing heavily in their fi ntech ecosystems, and we must not become complacent if we want to remain a top destination for investment and innovation in fi nancial services.

Priorities in UK ﬁntech

stablecoins, crypto and digital assets are essential. Equally important is fostering a ‘tech-positive’ regulatory environment that is agile and able to keep pace with the rapid advancements in the sector. Moreover, the full potential of artiﬁcial intelligence must be harnessed to drive eﬃciency and innovation.

Bold and urgent action is needed now to ensure the UK retains its competitive edge.

Bold and urgent action is needed now to ensure the UK retains its competitive edge. Progressing the open banking and open ﬁ nance agendas, delivering on the Mansion House compact and pushing forward on key areas like

The rise of APP fraud in the UK

Fraud is rising globally as technology enables more sophisticated scams. Authorised push payment (APP) fraud, the largest payment fraud in the UK, caused £459.7 million in losses in 2023 (UK Finance, 2024).

According to The Payment Systems Regulator (PSR), in 2023, purchase scams (a form of APP fraud), accounted for 68% of reported incidents, causing over £72 million in losses.

Authorised push payment fraud risks

APP fraud occurs when someone is tricked into transferring money directly to the account of a fraudster. Often taking the form of fake investment opportunities on search engines and social media, fraudsters transfer the funds to overseas accounts, making recovery diﬃcult. Beyond harming consumers, APP fraud can also damage businesses, eroding trust, customer relationships and reputation.

Combatting APP fraud

National growth opportunity

Fintechs have democratised fi nancial services and put the consumer back at the heart of the sector through aiding small businesses and individuals and driving greater fi nancial equality and inclusion. However, if we are to unleash the full power of fi nancial innovation as a driver of growth across the country, it is critical that industry, government and regulators work together to realise the vision of the UK being the best place in the world for fi ntechs to start, grow and scale. The time for forward progress, delivery and positive change is now — let’s not miss this opportunity.

Reference: 1. Innovate Finance (2024), FinTech Investment Landscape 2024.

Preventing APP fraud is difficult since scams originate outside the fi nancial sector, limiting banks’ ability to stop them at source. Social media platforms face criticism for insufficient action on APP fraud. While many platforms have introduced measures such as scam warnings, improved ad vetting and user education initiatives, these efforts are seen as reactive measures.

A lack of cohesive Know Your Customer (KYC) and Anti-Money Laundering (AML) standards across countries also exacerbates the issue, with fragmented data-sharing practices between Payment System Providers (PSPs), telcos and social media ﬁrms compounding the problem.

PSR reimbursement scheme

The PSR reimbursement scheme, requiring ﬁ rms to reimburse victims of APP scams up to £85,000 while not addressing the root cause, provides a degree of relief.

PSR rules reduced claim resolution times from up to two years to five days, ensuring most victims are reimbursed. However, smaller disruptors face financial strain, risking competition, financial inclusion and the UK’s fintech reputation.

To balance consumer protection with industry sustainability, many in the industry called for a 12-month review to address consumer care standards, regulatory thresholds and the role of social media. While Meta’s FIRE initiative represents progress, it doesn’t hold social platforms ﬁnancially accountable, leaving payment ﬁrms to address the issue.

Creating a safer payments ecosystem together

The Payments Association (TPA) plays a pivotal role in driving a crosssector approach by championing industry collaboration, advocating robust data-sharing frameworks and backing legislative initiatives like the Smart Data Bill. Through these eﬀorts, TPA aims to create a safer, more resilient payments ecosystem, protecting consumers and businesses from fraud.

WRITTEN BY George Iddenden Journalist, The Payments Association

WRITTEN BY Janine Hirt CEO, Innovate Finance

As the industry matures, the focus has shifted toward regulatory compliance and operational e ciency.

Innovation in payments enters a new chapter

As transformation matures, the focus shifts to artiﬁcial intelligence (AI), compliance and eﬃciency.

Financial innovation continues evolving, shaping the way we interact with digital commerce. According to Jim McCarthy, chief executive oﬃcer of global payments processor Thredd, we’re currently in the middle stages of this transformation: while signiﬁcant progress has been made, there’s still more to come.

WRITTEN

Elizabeth Meager

Expanding payment convenience globally

As with the ﬁ rst modern credit card, Diners Club, which started as a card for New York City restaurants, consumer demand for ever greater utility continues to drive ubiquity. A prime example of this shift is Alipay’s integration of MasterCard credentials, enabling its users to make payments globally wherever Mastercard is accepted in what was once a massive, but closed, domestic system.

Apple Pay’s launch in 2014 transformed the way consumers engage with payments. Ten years later, leaving home to go for a run without a wallet and tapping a watch to pay for coﬀee or to enter a transit system still feels exciting, says McCarthy. Yet, even smarter experiences are emerging creating opportunities for businesses of all kinds.

AI: a tale of duality

AI will play a critical role in ﬁ nancial technology. Tokenisation — an innovation that essentially hides payment credentials — has been instrumental in enhancing security.

The intersection of AI and payments is leading to new concepts like agentic commerce, where digital assistants powered by AI securely conduct transactions on our behalf with the help of tokenisation.

Yet, while AI is a powerful tool for security, it also poses its own risks. Fraud detection has always been an arms race not least because “the tools the good guys are using to ﬁght fraud are often the same tools the bad guys are using,” explains McCarthy.

Protecting consumers from scams Historically, fraud detection involved a degree of manual modelling. Today, AI automates this process, learning from vast datasets to identify fraud faster and more accurately. A big challenge in fraud prevention is human error. Many scams rely on individuals willingly providing information or transferring funds to fraudulent accounts. Unlike cardbased payments, which have dispute mechanisms, account-to-account (A2A) payments lack the same protections.

Companies like Thredd, along with partners like Featurespace, a Visa company, are developing new approaches to mitigate these risks, such as AI-enabled scam detection services that ﬂag suspicious transactions before they’re completed.

Regulation and compliance: a growing priority

In the early days of ﬁ ntech, neobanks prioritised sleek interfaces and seamless digital transactions to

diﬀerentiate themselves. However, as the industry matures, the focus has shifted toward regulatory compliance and operational eﬃciency.

As oversight has tightened, fintechs work to be more transparent and help their bank sponsors comply with regulatory standards. This shift is evident in recent back-office modernisation efforts. Automating compliance processes, enhancing fraud detection and reducing operational costs have become key focus areas for fintechs and their partners.

This is especially true as raising capital has become more expensive, prompting a closer focus on profitability as opposed to simply top-line growth. “Fraud disputes and chargebacks can really eat into your profits,” explains McCarthy. “Our clients are increasingly asking: how can you help me take cost out and run a more efficient and compliant programme?”

The future of ﬁnancial innovation While AI presents new opportunities for fraud detection and automated commerce, it also raises concerns about trust and security.

Ultimately, the future of finance will continue to be built on trust. As financial institutions, fintechs and ecosystem partners work together to create a safer, more efficient digital economy, the challenge remains the same: continuing to innovate while ensuring security, transparency and protecting the bottom line.

Why small firms need flexible support channels

for tax compliance

The UK’s 5.5 million small businesses lose 280 million hours and £25 billion annually to tax compliance,1 with huge productivity gains possible by reducing this burden.

Aswift and responsive customer services system from HM Revenue & Customs (HMRC) would be a huge help. People who run small firms want to pay the correct amount of tax and can feel enormous levels of anxiety following innocent mistakes. This level of stress is compounded by the length of time it often takes to correct even simple errors.

Digital tax shift challenges

As HMRC invests in its digital channels, builds up its knowledge bank of online resources and explores how artificial intelligence can be deployed in a way that is smart and user-friendly, more of its customer service contacts can be expected to move away from more traditional contact methods. However, there will always be a strong argument for providing some channels that allow humans to talk to other humans, rather than a computer, especially where sensitive and complex areas like tax are concerned.

A National Audit Office report on HMRC’s customer services noted that telephone and correspondence services ‘have been falling below the expected service levels for too long’ while the tax authority’s push to shift more customer service enquiries to digital channels was ‘too aggressive,’ especially while demand for contact remained high.

Flexible customer service needed

While HMRC’s web presence and digital services contain a lot of information, there are times when only speaking to a real person will do, especially regarding complicated queries.

This is not to say that HMRC’s digital offering does not have a part to play — far from it. Small businesses rightly expect and demand a flexible mix of customer service channels from the tax authority, so that they can choose the method which works best for them. Making it easier to resolve tax queries will help small firms become confident they have paid the right amount, reduce the burden of stress they are under and raise the UK’s productivity levels.

Reference: 1. Federation of Small Businesses, 2021. A Duty to Reform.

Breaking the gridlock: tax reform as the key to housing and regional growth

The UK’s housing market faces regional growth challenges, worsened by an ineffective tax framework. Comprehensive tax reform is needed to promote equitable housing development and reduce regional disparities.

The Government’s ambitious pledge to build 1.5 million homes over five years underscores the critical need for such reform. However, achieving this target requires more than just political will; it demands a robust delivery plan that aligns housing policy with fiscal measures.

Barriers to housing development

One significant barrier is the existing tax system’s emphasis on property-related taxes, which constitute 4% of GDP (double the OECD average). Taxes like stamp duty land tax (SDLT) hinder mobility by imposing financial penalties on property transactions, thereby discouraging downsizing or relocation to regions with better employment opportunities. This rigidity stifles labour market flexibility — a vital component of regional economic growth.

Moreover, the exemption of primary residences from capital gains tax (CGT) incentivises over-investment in housing, contributing to price inflation and affordability issues. This dynamic disproportionately affects regions like London and the South-East, where soaring property values widen the wealth gap between areas, hindering economic convergence.

Need for comprehensive tax reform

The private rented sector also suffers under the current tax regime. Value-added tax on repairs and refurbishments dissuades landlords from maintaining and improving properties. In areas with weaker rental demand, poor-quality housing stock compounds economic stagnation, deterring inward investment and population retention.

To realise its housing ambitions and promote balanced regional growth, the Government must undertake comprehensive tax reform. Adopting a more neutral, transparent and simplified tax framework could align housing and regional growth policies. For instance, replacing SDLT with a recurrent land value tax would reduce transaction distortions, encourage efficient land use and provide stable revenue for local governments. Additionally, reforms to CGT could disincentivise speculative investments, freeing capital for business and infrastructure development in underperforming regions.

Transform housing policies for growth

The UK’s housing crisis and regional disparities will persist unless we address the structural flaws in the tax system. Comprehensive tax reform is not just desirable but essential to transform housing policies into a catalyst for equitable and sustainable national growth.

The rise of third-party tax data and what you need to know

As technology advances, it has become easier for HMRC to locate and use third-party data to calculate individuals’ tax bills — but there are pitfalls to watch out for.

When it comes to your tax affairs, unless you are one of the 12 million people required to submit a tax return, you will probably be relying on HMRC to calculate your taxes. HMRC does this automatically, based on information it has received from third parties like employers, banks and pension providers.

Tax reconciliation issues

Each year, employers give HMRC details of their employees’ salaries and benefits; banks provide interest figures; and pension providers share pension payments. HMRC uses this information to reconcile millions of taxpayers’ records — an exercise which takes many months to complete — and then issues refunds or demands for extra tax as appropriate. Without this use of third-party data, many more of us would need to file an annual tax return. Yet, can we always rely on this approach? HMRC does not generally receive details of common items that might affect your tax such as pension contributions, gift aid donations, dividends or capital gains and, outside of self-assessment, there are few, simple online ways to report these items. Furthermore, the automated matching of bank accounts and interest information to taxpayer records is not infallible. Data used for savings and benefits in tax codes can often be out of date or estimated.

What should you do?

While it’s easy and tempting to rely on HMRC to get things right, if something does go wrong, the responsibility for paying the correct tax remains with you: the taxpayer. That can be challenging if, for example, you can’t easily see or understand the figures that HMRC is using.

Automation has a lot of benefits for both HMRC and taxpayers but, under current law, taxpayers need to know that this doesn’t absolve them of their responsibilities to get their tax right. It’s essential that HMRC does more to provide information that taxpayers and their agents can easily check and correct — and that taxpayers are aware of gaps and potential errors in the information that HMRC holds.

WRITTEN BY Martin McTague National Chair, Federation of Small

WRITTEN BY Jeffrey Matsu Chief Economist, CIPFA

WRITTEN BY Helen Thornley