Chapter 6: Changes to HMRC Data Collection
169.The draft Finance Bill published in July 2023 sets out a new power for HMRC to require additional data from employers and individual taxpayers.267 The background to this measure is the Government’s 10-year tax administration strategy, Building a trusted, modern tax administration system, published in July 2020, which stated that: “COVID-19 has emphasised the value of a tax authority having access to real-time data.”268 In July 2022 the Government followed up the strategy with a consultation, Improving the data HMRC collects from its customers269, proposing a number of potential options for improving the range of data HMRC collects. A summary of responses was published in April 2023, setting out plans to proceed with some of the less burdensome options where taxpayers already hold the relevant data.270 The Government also committed to publishing draft legislation for technical consultation before enacting these provisions.
170.The new power is broad and general in scope. It does not specify the precise information concerned but indicates that some of it will be required in the context of personal tax returns and some as part of PAYE returns by employers. The detailed requirements will be set out in regulations that are expected to be published during the parliamentary stages of the Finance Bill, likely in early 2024271. The information required will be limited to that which HMRC considers relevant for: “the collection and management of any of the taxes listed in Section 1 of the Taxes Management Act 1970”, i.e., income tax, capital gains tax and corporation tax.272
171. The draft regulations implementing this proposal were not available during the consultation period on the draft legislation, nor during the evidence-gathering stage of our inquiry. We and our witnesses have, therefore, had to rely on the consultation and summary of responses, the policy paper accompanying the draft legislation, published in July 2023 (the July policy paper)273 , and explanations made by HMRC in the course of their evidence to this inquiry, to try to understand what is involved.
172.Witnesses told us that the absence of any draft regulations made it difficult for them to comment in detail on the proposals. CIOT urged HMRC: “to publish draft regulations before the enabling legislation has been enacted”274, and this was echoed by ATT and ICAS.275
173.The July policy paper listed three specific types of new data to be collected by HMRC, with effect from financial year 2025/26276. The first of these concerns employee hours, which the Government anticipates will affect 1.9 million PAYE-registered business277.
174.At the time the July policy paper was drafted, the proposal was for employers to be required to report the number of employee hours worked as part of PAYE returns under the Real Time Information (RTI) system. This was amended to require the number of employee hours paid to be reported when the July policy paper was updated on 22 November 2023. This was after we had taken evidence from our non-Government witnesses, whose evidence dealt with the Government’s original proposal.
175.In that context, the evidence on this point reflected general concern about the difficulties in collecting the number of hours actually worked, on the basis that few employers would routinely and systematically collect such data, particularly in the case of salaried employees: “If you are a salaried employee, your employer probably does not count how many hours’ work you do on the weekend, if you take a bit home and do it here and there, or if you are working the odd bit of overtime. It will be quite difficult to gather”278.
176.The second type of data requirement is for owner-managers of companies to differentiate between dividends paid to them by their own company and those paid by other companies in their self-assessment income tax returns. The Government expects 900,000 businesses will be affected.279
177.Finally, self-employed people will be required to provide information about the start and end dates of their periods of self-employment in their self-assessment tax returns. The Government expects this requirement to affect up to 1.2 million self-employed businesses each year.280
Employee Hours Data
178.There was general support from witnesses for the principle of improving HMRC data. Samantha O’Sullivan of the Chartered Institute of Payroll Professional (CIPP) said that: “improving the data that HMRC collect can only be a good thing”, provided that: “a massive additional administrative burden is not put on payroll teams.”281 Dr Andy Summers, Associate Professor in the Law School at the London School of Economics (LSE), emphasised: “the potential utility of systematically collecting employee hours data for policy development purposes, not only in HMRC but across Government departments”.282
179.A number of witnesses, however, stated that they were unclear about the reasons for collecting data on employee hours, and how this data would be relevant to the ‘collection and management’ of the relevant taxes. Ms O’Sullivan said CIPP would: “push for [HMRC to set out] … the intention behind the requirement for the data, in order to get buy-in in the first instance”,283 and explained that CIPP’s members were concerned that: “their clients would not be very forthcoming with the information unless they knew specifically what this data was going to be used for.”284
180.We asked HMRC how the additional information that it will require on employee hours will be used. Zoë Nettlefield, Deputy Director, Strategic Data Policy, told us that: “this work was prompted by the use of HMRC’s data to deliver Covid schemes and the data gaps that we identified in using tax administration data for non-tax purposes.” She explained that:
“It is the information, the intelligence that we can use to understand whether there is undeclared tax and [national insurance contributions (NICs)], and similarly with regard to the national minimum wage, which HMRC has operational responsibility for the enforcement of. Similarly, there is NICs relief in freeports and investment zones. It enhances the data that we can use to target activity and put nudges and prompts in those compliance areas.”
181.The Financial Secretary added that: “a lot of the information is genuinely—I know there is a lot of scepticism here—to help correct errors.”
182.Following his oral evidence, the Financial Secretary wrote to the Chair with more detail about the uses of the data:
“Employee hours data will provide a better understanding of economic activity, and the impact of economic shocks on the income of employees. … HMRC envisages that the new hours information will enable them to accurately identify the correct population for any future promote and upstream activity285 and drive even more complaints from workers about underpayment of NMW.”
183.Some witnesses were not convinced that this data would help with HMRC’s responsibility for enforcing compliance with the National Minimum Wage (NMW) and National Living Wage (NLW) as, if the employer were paying less than NMW or NLW, the data could easily be manipulated to conceal this. Dr Emma Rawson of ATT said that if: “you are an employer who is purposefully and egregiously not paying minimum wage, will you reliably be reporting that, or will you perhaps massage your figures?”286.
184.Dr Summers recognised that only collecting: “information that is ‘relevant for the purpose of the collection and management of any taxes listed’” (income tax, capital gains tax and corporation tax) limited the data that could be collected and how it could be used.287 He stated that this new power: “seems barely any wider than the power which HMRC already has.”
185.ICAEW noted that:
“In the original consultation document on employee hours, the Government stated that: ‘Having a more detailed analysis of the hour[s] employees work would help with the analysis of labour market trends across government. It would improve government interventions in the labour market through increasing our understanding of both voluntary part-time work and under-employment.’” 288
ICAEW added that the draft legislation states that the information requested must be: “to facilitate the collection or maintenance of tax. If the latter is not the true reason for collecting the data, then it is debatable whether the draft legislation could be enforced.”289
186.In terms of the benefits to be derived from the additional data, witnesses were sceptical of the claim in the July 2023 policy note that the additional data would: “provide better outcomes for taxpayers and businesses.”290 Dr Rawson said that she could: “see cost to businesses of doing a lot of this” and was: “doubtful as to whether there will be additional benefit.”291 Because of the lack of clarity about how HMRC would use the data, CIOT found it: “very difficult to gauge to what extent these costs are proportionate to the expected benefit.”292
187.In terms of the benefits for HMRC, ATT’s view was that: “HMRC [has] not made a convincing case as to the benefits it will derive from much of the data.”293 ICAEW invited the Government to: “make better use of the data it already collects, rather than placing the burden of data collection on businesses.”294
Costs
188.The Government estimates that providing employees hours data will cost employers £35m in one-off set up costs, with negligible on-going costs. Our witnesses calculated that this meant costs of somewhere between £18.25 and £35 per employer. The July policy note said that HMRC’s estimate was:
“based on assumptions about data employers are required to keep, to satisfy National Minimum Wage and National Living Wage rules, and how easy it would be to include that data in the Real Time Information (RTI) submission process they already follow”295
The policy note did not, however, set out what these assumptions were.
189.Witnesses suggested that the costs to employers of providing this information had been under-estimated. ICAEW said it considered that: “the one-off cost is likely to be significantly higher than the total cost of £35m estimated by HMRC”296. CIOT told us that they were: “mystified [about] how HMRC have calculated the average transitional costs to businesses. … we expect the real-life costs to be significantly higher”297. Ms Milner said that it: “would be really helpful for HMRC to be transparent about the calculation”.298
190.While witnesses’ views that the costs have been under-estimated were driven in part by uncertainty about exactly what data would be required, they also felt that HMRC had not fully appreciated the amount of work that would be needed on the part of employers. ICAS told us that the information on employee hours that employers hold in their systems will: “not necessarily be in the reporting system used for filing RTI returns with HMRC”.299 Mr Hart stated that larger businesses have: “full-blown systems that do all their finance, payroll and HR” and that the software licenses alone for such systems are: “in the £1 million plus range, so you can imagine the change cost is not insignificant.” He noted that most older software includes mechanisms to handle legislative change but said that: “the costs come in when you want to install that software, test it in parallel with your live service, and make sure everything is performing.” 300
191.Medium-sized companies, on the other hand, frequently have separate HR and payroll systems: “so they would have to onward develop the linkage between these … systems. That has a cost, which may be bespoke for quite a lot of individual providers”.301
192.In relation to smaller businesses Mr Hart explained that: “there is a complete mix.” There are simple and low-cost software solutions, but these are typically payroll systems, meaning that they quite often do not collect the number of hours worked. He added that, while upgrading the products may not lead to an additional software licensing costs, there would be other costs involved as: “they still have to implement it, test it, train on it and make sure nothing is broken.” In addition to these implementation costs: “there is a significant ongoing cost of trying to get this data on every pay period”.302
193.Similarly, employers who contract out their payroll operations would have to pay extra for these additional data requirements. Ms O’Sullivan told us that: “service providers … may need to change their data-gathering processes” and explained that: “it is not just about what the system needs; it is the starting process … That could take time to develop and implement alongside the financial implications.”303
194.Witnesses were not persuaded that the ongoing costs would be negligible. ICAEW told us that it did not: “agree with the government’s assessment that ongoing cost would be ‘negligible’.”304
195.When we asked HMRC specifically about the costings, Ms Nettlefield told us that HMRC was: “refining the costings” and that it would publish an updated version: “when we publish the draft regulations in the new year.”305
196.Witnesses also emphasised the need for support and guidance ahead of the implementation of this requirement. Ms O’Sullivan asked for this to be: “brought forward … to explain the new requirements and to get employers’ buy-in.”306 She added that CIPP: “would like to see some pilots run … we could probably come up with a list of recommended companies that you could use for legislative pilots.”307
197.From the evidence received, it seems very likely that the costs to employers of providing this data, both one-off and on-going, have been significantly underestimated.
198.We recommend that HMRC publishes the assumptions on which the costs to businesses of the employee hours requirement were based. HMRC should then work with interested parties to review these costings and produce revised estimates that are more realistic and re-evaluate the extent to which the proposed benefits outweigh these costs.
199.We consider that the case for requiring employers to provide employee hours data to HMRC has not been made out. Additional burdens should not be imposed on businesses unless there is a compelling reason for doing so. It is not clear how understanding economic activity, enforcing the National Minimum Wage and the National Living Wage, planning for contingencies, or assessing NICs reliefs can be considered to be “for the collection and management” of the listed taxes, as specified in the draft legislation.
200.At the time they gave evidence, witnesses remained unclear about exactly what information on employee hours was required and for what purpose, despite the fact that consultation on this measure has been on-going for more than a year. This level of uncertainty at this stage in the development of the measure is unacceptable. The Government should have been much more transparent from the beginning about what information is required and how it will be used. We do, however, welcome the Government’s clarification that the requirement is for data relating to hours paid rather than hours worked.
Sharing data
201.There was uncertainty among some witnesses about whether HMRC intends to share the newly required data with other Government departments and agencies. CIOT noted that the original consultation document suggested that the data would be collected so it could be used for sharing across Government departments. It said that this: “does not seem to have much, if anything to do with tax” and that: “it is not at all clear what data HMRC will share with other parts of Government, or whether they will use it only for their own compliance purposes, or both.” 308 ICAS said that, if there are plans to share the data: “there should be further consultation and a clear explanation of what will be shared”.309
202.Conversely, Dr Summers felt that: “there should be a lot more sharing of … individual level data … We could get a great policy evaluation resource from this.”310 Ms O’Sullivan felt that sharing this data across Government: “could result in a more holistic and compliant approach, which again could only be a good thing.”311
203.The Financial Secretary confirmed that: “there is the intent to gather this for sharing purposes” but acknowledged that this was subject to legal restrictions.312 HMRC explained to us that: “before any information can be passed to another government department or agency a legal power to disclose that information must be identified”,313 and pointed us to Sections 18(2) and (3) of the Commissioners for Revenue and Customs Act 2005314 which allows for this. It also told us that: “there are in excess of 250 of these ‘legal gateways’ which permit HMRC to disclose information it holds”.315
204.Witnesses suggested that it was also unclear exactly what data HMRC will require where employees are not paid by the hour. Although contracted hours should be readily available, ICAEW noted that these: “are likely to change more often than in the past”316 and Ms O’Sullivan pointed out other issues with contractual hours: “What about when someone is on statutory leave for sickness or maternity? If someone is doing a phased return to work, a number of hours are being worked, but that combines with taking time off sick.”317
205.Ms Nettlefield confirmed that HMRC was only asking for: “contractual hours, or the number of hours paid if it is an hourly paid individual.”318 She added that where: “overtime is paid, there are additional hours counted and paid for, and that would be counted as the amount of hours paid for.”319
206.The Government should clarify its intentions concerning sharing data about employee hours with other Government departments and agencies. It should consult with relevant stakeholders before any such sharing takes place, even if it is permitted under existing powers.
207.HMRC must publish guidance to help employers and businesses understand exactly what data they need to provide as early as possible in 2024.
208.HMRC must set out how the collection of employee hours data falls within the stated purposes of being for “the collection and management of the listed taxes”, as specified in the draft legislation for Finance Bill 2023–24. If the Government wishes HMRC to collect data that is not directly necessary for these purposes, this should be specifically legislated for, following a full consultation to consider the implications of such an extension of HMRC’s powers.
Data on dividends and dates of self-employment
209.Witnesses could see a much clearer connection between: “the collection and management of tax”320 and the requirement for additional information about dividends for owner-managers and dates of self-employment. Dr Rawson explained that there are a number of reasons for HMRC to want data on dividends, particularly from owner-managed companies, noting that HMRC: “is interested in seeing what people are drawing out of their companies. There are aspects to do with off-payroll working and IR35.”321 ICAS also saw that this information: “will help HMRC target its compliance activity.”322
210.HMRC told us that:
“improved data will give HMRC a better view of the total package of remuneration received by the Company Owner Manager (COM) from their own company, which will help ensure better targeting of reliefs and the monitoring of tax-motivated incorporation. This will also provide greater flexibility in general, better insights into the COM population and help focus compliance activities on those individuals who engage in tax avoidance.”323
211.CIOT did not see that: “splitting dividends between the amount of dividend income received by a shareholder from their own company separately to other dividend income … would be a particularly onerous task”. Similarly, on the start and end dates of self-employment, it told us that it did not: “consider this proposal to be too onerous.”324 None of the evidence we received challenged the Government’s estimate of £9 million one-off set-up costs and £9 million per annum on-going costs for the dividend information, and £600,000 per annum for the information on dates of self-employment.
212. The difficulties HMRC experienced during the COVID-19 pandemic in providing relief under the Covid schemes was also highlighted as a justification for the requirement of additional data. Bill Dodwell of the Administrative Burdens Advisory Board said that: “the Government have reasonably made the point that if they had only had more data, they could have awarded owner-managers of companies support money under Covid schemes, but clearly they could not do that.”325
213.Nonetheless, witnesses felt that some points of detail needed clarification. On the percentage shareholdings of directors of close companies326, ATT noted that this: “could change in-year and there could be different classes of shares”,327 and CIOT suggested that: “the figure would need to be an annual snapshot.”328
214.There was also uncertainty about the position of shareholders in close companies who were not directors. ICAS said that it was: “important that the scope is not extended to cover all shareholders”329—that is, those who are not also directors.
215.On the requirement to provide the start and end dates of a period of self-employment, HMRC told us that: “more accurate information on trading activity would improve our understanding of the characteristics of the trading population during the crucial make-or-break first year”, which would help with the process of designing and evaluating policy interventions. It noted that this additional information: “could also help inform HMRC’s small business compliance activities and allow help to be provided early in the business cycle.”330
216.ICAS was concerned that: “unrepresented taxpayers may not always find it easy to identify their start date, particularly where, for example, a hobby has developed into a business”.331 ATT noted that: “gross annual trading income does not need to be reported until it exceeds £1,000”, meaning that: “reporting profits may start or cease in a different year to that of the trade.”332 CIOT said that: “appropriate guidance to help taxpayers identify the dates their business started and ended should be provided by HMRC.”333
217. HMRC said that additional information about dividends for owner-managers would make it easier to operate relief schemes in any future emergency. This is not, in our view, relevant to the collection and management of tax.
Other sources of information
218.In line with queries raised by several of our witnesses, the Committee noted that the information on directors and others with effective control over from close companies would now be held in electronic form by Companies House following the adoption of the Economic Crime and Corporate Transparency Act 2023. We questioned whether, rather than imposing additional requirements on taxpayers, the information on dividends from close companies could not therefore have been obtained directly from Companies House, rather than by requiring additional information from taxpayers in their self-assessment returns.
219.Dr Summers said that this could, in theory, be done: “via the short step of making it possible to link individuals’ Companies House records and HMRC records.”334 He explained, however, that: “across our systems of government, we do not have consistent identifiers for individuals. So, it is currently not straightforward to link up to Companies House records.”335
220.HMRC explained that it had: “looked at whether we could bring across data” from Companies House but:
“To be able to match that data appropriately we would probably need Companies House to collect more data so that we had the right identifiers to be able to bring that across and match it to HMRC’s systems. Given that people are already submitting dividend data in their ITSA tax return, it is just a small addition, and the additional burden is minimal. We thought that, overall, that was the smaller burden than enhancing the Companies House collection and sharing it across to HMRC.”336
221.While we accept that a lack of common identifiers in the data held by HMRC and Companies House respectively means that it is not possible for HMRC to cross reference the information held by Companies House regarding dividends paid to owner-managers, the Government should consider how to make its systems compatible with each other so that they are able to exchange data where appropriate.
Timing
222.ATT told us that businesses and their software providers will: “need time to create or update their systems to collate the additional information required.”337 ICAS was keen to ensure that there was: “adequate time for implementation of changes,” asking that HMRC: “commence this vital work as soon as possible” as the extent to which the target of 2025/26 is achievable: “will depend on how quickly HMRC publishes regulations and undertakes the detailed consultation required and its ability to produce guidance for all three categories.”338
223.Mr Dodwell, however, felt that implementation: “was perfectly achievable by 2025,” provided that HMRC releases relevant details to software providers in: “plenty of time.” 339 Mr Hart agreed but cautioned that: “it may still take some time to work through the scenarios to make sure we are able to capture all that information … there needs to be transparent government briefing.”340 He pointed out that, in relation to 2025: “it is all hands to the pump in delivering Making Tax Digital for income tax and self-assessment” and there is, therefore, already a: “tight timeline to make [software for this] available for public beta in 2025 and to go live in its entirety in 2026 … we would not welcome even more obligations to incorporate here.”341
224.It is disappointing that the Government did not publish draft regulations with detail about the nature and extent of the additional data to be required by HMRC for consultation at the same time as it published the draft legislation or even the Finance Bill. This delay reduces the amount of time businesses have to prepare for the introduction of these new requirements.
225.Early publication of draft regulations and full consultation on the detail of the additional data to be required by HMRC is crucial if the Government is to go ahead with a 2025/26 start and the Government must, in any event, allow all stakeholders sufficient time to make the changes necessary for these additional requirements before they are implemented.
267 HMRC, ‘Change to data HMRC collects from customers’ (18 July 2023, amended on 22 November 2023): https://www.gov.uk/government/publications/change-to-data-hmrc-collects-from-customers [accessed 22 December 2023]
268 HMRC & HM Treasury, Building a trusted, modern tax administration system (21 July 2020): https://www.gov.uk/government/publications/tax-administration-strategy/building-a-trusted-modern-tax-administration-system [accessed 22 December 2023]
269 HMRC, ‘Improving the data HMRC collects from its customers’ (27 April 2023): https://www.gov.uk/government/consultations/improving-the-data-hmrc-collects-from-its-customers/improving-the-data-hmrc-collects-from-its-customers [accessed 22 December 2023]
270 HMRC, ‘Improving the data HMRC collects from its customers Summary of responses’ (27 April 2023): https://www.gov.uk/government/consultations/improving-the-data-hmrc-collects-from-its-customers/public-feedback/improving-the-data-hmrc-collects-from-its-customers-summary-of-responses [accessed 22 December 2023]
271 Letter from Nigel Huddleston MP Financial Secretary to the Treasury to Lord Leigh of Hurley Chair of the Economic Affairs Finance Bill Sub Committee (12 December 2023): committees.parliament.uk/publications/42711/documents/212323/default/
272 Finance Bill, clause 35 [Bill 014 (2023–24)]
273 HMRC, ‘Changes to HMRC data collection’ (22 November 2023): https://www.gov.uk/government/publications/change-to-data-hmrc-collects-from-customers/changes-to-hmrc-data-collection [accessed 22 December 2023]
276 Finance Bill, clause 35 [Bill 014 (2023–24)]
277 HMRC, ‘Changes to HMRC data collection’ (22 November 2023): https://www.gov.uk/government/publications/change-to-data-hmrc-collects-from-customers/changes-to-hmrc-data-collection [accessed 22 December 2023]
279 HMRC, ‘Changes to HMRC data collection’ (22 November 2023): https://www.gov.uk/government/publications/change-to-data-hmrc-collects-from-customers/changes-to-hmrc-data-collection [accessed 22 December 2023]
280 HMRC, ‘Changes to HMRC data collection’ (22 November 2023): https://www.gov.uk/government/publications/change-to-data-hmrc-collects-from-customers/changes-to-hmrc-data-collection [accessed 22 December 2023]
285 Promote activity is activity relating to NMW enforcement.
290 HMRC, ‘Changes to HMRC data collection’ (22 November 2023): https://www.gov.uk/government/publications/change-to-data-hmrc-collects-from-customers/changes-to-hmrc-data-collection [accessed 23 January 2023]
295 HMRC, ‘Changes to HMRC data collection’ (22 November 2023): https://www.gov.uk/government/publications/change-to-data-hmrc-collects-from-customers/changes-to-hmrc-data-collection [accessed 23 January 2023]
314 Commissioners for Revenue and Customs Act 2005, section 18
320 HMRC ,’Changes to HMRC data collection’ (22 November 2023): https://www.gov.uk/government/publications/change-to-data-hmrc-collects-from-customers/changes-to-hmrc-data-collection [accessed 22 December 2023]
321 Q 24 (Dr Emma Rawson)and HMRC, ‘Understanding off-payroll working (IR35)’: https://www.gov.uk/guidance/understanding-off-payroll-working-ir35 [accessed 22 December 2023]
326 A close company is a business entity owned by a small group of shareholders (participators); each shareholder will typically have some degree of decision-making authority within the company.