Voluntary PAYG will apply to unincorporated businesses, sole traders and landlords, in respect of their income tax/National Insurance contributions/Capital Gains Tax, from 1 April 2018, to VAT from April 2019 and to incorporated businesses, in respect of their corporation tax affairs, from 2020.

According to the consultation, under PAYG taxpayers will decide how often and what amount they want to pay and payment will not have to be at any fixed time, or at regular intervals. Voluntary payments will sit on the taxpayer or business digital account as a credit and will be allocated against liabilities as they become due, across their taxes, using appropriation rules set by HMRC (generally a first in first out basis, subject to certain over-riding criteria such as EU taxes and levies). Unused credits will be carried forward for use against future tax liabilities.

Payment dates

In order to make sure HMRC can handle this process, the consultation suggests it is likely taxpayers will need to indicate they intend to make a voluntary payment, probably by selecting an option in their software/digital account. This will not commit customers to making payments, but the existence of an indicator would ensure that voluntary payments are correctly identified, received and held on the correct record.

Taxpayers can choose how and when to pay. HMRC says they might opt to make a voluntary payment at the point they submit their update, when their digital tax account is being updated with actual and estimates of tax liability, with the software presenting various options and taking them straight to the payment functionality/facility.

A variation to this may be that a taxpayer chooses the flexibility to simply pay a voluntary sum to HMRC, before the statutory due date, as and when they want to. However, the consultation suggests that for systems capacity reasons it may be necessary to restrict the number of payments in a period.

A further option would be for a taxpayer to enter into a more regular commitment, by setting up a direct debit arrangement, similar to those applying for utility bills, so that a regular amount is paid to HMRC. This is essentially an extension of the current Budget Payment Plan into MTD, although all interactions would take place digitally.

‘Period of grace’

The consultation uses case studies to illustrate how voluntary PAYG would work in practice, and discusses potential issues which will need to be addressed. These include the design of the online account, so payments are clear to taxpayers, and the question of what happens when someone makes a voluntary payment towards their future income tax liability, but has VAT payments owing.

The examples given illustrate how this could work for businesses, once VAT comes within MTD in April 2019, with HMRC saying that integrated view across all of the taxes will make it easier to see what tax bills are due, what credits are on the business’s account, and what estimated liabilities may crystallise as due at a future date.

HMRC suggests it may need to build in rules for digital accounts that allow a ‘period of grace’ before the credit is set against the liability that has arisen, to allow for separate, non-voluntary payments made on the due date. If no separate payments are made, the credit would be allocated, retrospectively, as at the due date to ensure no late payment interest arose.

As regards the allocation of any payments across taxes, HMRC says there is already legislation in place that allows the set-off by HMRC of a customer credit against a customer debit, and it expects to make more use of these powers once MTD is in operation.

Payment allocation

The consultation considers the allocation and set-off of payments in general - looking at the customer, legislative, operational and systems impacts; protecting contributions towards benefit entitlements; ring fencing sums that are for onward transmission (e.g. VAT MOSS); and reviewing the order of appropriation where more than one tax is due and payments made are insufficient to cover them all.

HMRC also says it anticipates including within new digital accounts a facility for any voluntary payments to be returned if circumstances change, for example if a business goes on to experience unexpected losses or needs to replace assets. However, it suggests there may be limitations on repayments requested shortly before a liability becomes due, with these potentially restricted to the credit over and above that liability.

HMRC says it will need to establish certain parameters to prevent improper or inappropriate use of any payment and repayment facility, for example money laundering. It may also need to introduce minimum and maximum payment limits for security or administrative reasons.

The consultation examines the interplay between voluntary payments and income tax payments on account, with HMRC acknowledging that in some circumstances  the digital account could show a discrepancy between the amounts payable based on the previous year’s liability and the real time estimates from updates already submitted.

HMRC says this  gives a conflicting message to taxpayers on how best to budget towards their eventual liability, and wants to explore whether there is any scope for revisiting the rules around payments on account. It also says taxpayers with accounts which show an overpayment should be given the option of offsetting this amount against a future liability as a voluntary credit, as well as having a repayment from HMRC as at present.

There is also the question of how interest is charged on different tax repayments. HMRC suggests that once digital record keeping and updating is firmly embedded, there will be opportunities for implementing some earlier repayments.

A further section of this consultation considers how voluntary PAYG would work for partnerships, which will need to have an indication of the amount of liability falling on each partner in respect of their partnership shares. HMRC says this could be left to the partnership and the partners to discuss and arrange separate from HMRC. Alternatively, specific arrangements could be built into HMRC systems to facilitate this, so that partners would be able, on a voluntary basis, to authorise a limited data flow from their digital account to the partnership to enable this.

HMRC says it has planned a randomised controlled trial with self-assessment taxpayers in summer 2016 to test out their appetite for voluntary PAYG, and is also asking for suggestions for any additional processes or measures that could encourage wider take-up.

The Making Tax Digital: Voluntary pay as you go consultation document is here.