18 September General Comments

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18 September 2015 BBA response to HM Revenue & Customs (HMRC) Deduction of income tax from savings income: implementation of the Personal Savings Allowance - Consultation document The British Bankers

1 18 September 2015 BBA response to HM Revenue & Customs (HMRC) Deduction of income tax from savings income: implementation of the Personal Savings Allowance - Consultation document The British Bankers Association (BBA) is the leading association for the UK banking and financial services sector, speaking for 200 banking members, headquartered in 50 jurisdictions and operating in over 180 territories worldwide jurisdictions. The BBA is pleased to respond to HMRC s Deduction of income tax from savings income: implementation of the Personal Savings Allowance - Consultation document and welcomes the opportunity to consider possible changes to the tax deduction obligations for non- Tax Deduction Scheme for Interest (TDSI) interest as part of a wider simplification of arrangements for deduction of tax from interest. General Comments In the experience of BBA members, their customers find the current processes for registering for gross interest or reclaiming overpaid tax difficult to understand and cumbersome. The Personal Savings Allowance (PSA) will make things much simpler for customers. A consistent approach for both TDSI and non-tdsi interest payments will simplify matters further, removing the need for customers, many of whom are vulnerable, to reclaim overpaid tax and make the changes much easier to understand. On the other hand, maintaining the current arrangements for non-tdsi interest will make the changes less clear and carries the risk that customers will become confused about what they need to declare to HMRC. It is the view of the BBA that the simpler the system, the more likely it is that customers/taxpayers will understand their tax obligations and pay the right tax to HMRC. This is supported by the fact that HMRC will continue to receive interest paid information from Financial Institutions (FIs) and therefore be in a position to amend tax codes accordingly, if both TDSI and non-tdsi interest payments were to be made gross. Simplicity of tax deduction requirements would also facilitate systems automation, which is necessary for FIs, given the high volume of transactions that they process. A blanket approach to tax deduction requirements would generally be easier to implement than a set of requirements that differentiates treatment based on customer status or transactional value. We would welcome any further insight into HMRC s longer term plans for how customers will manage their compliance obligations (e.g. digital tax returns and tax accounts as referred to in section 2.21 of the document) as this will impact assessment of the risk of customers not paying the right tax. In addition, the scale and nature of these changes means that, to the extent that bank systems changes are required, early visibility of requirements would be beneficial.

2 2 Responses to Specific Questions Question Other than the issues identified in this consultation, are there other key issues that need to be considered in relation to the interaction of the PSA and rules on deduction of income tax from interest and other savings income? Extending the removal of the requirement to deduct income tax at source from interest payments to UK authorised funds that pay interest distributions would create a level playing field with UCITS funds from other jurisdictions (such as Ireland and Luxembourg), that are already marketed to retail investors in the UK and from which UK investors already receive gross payments of interest. The document comments at 2.7 that royalties and annual payments are not savings income. There may be other payments that customers receive in relation to their current accounts or savings accounts (e.g. rewards payments) that may be annual payments, but won t be interest. It may be that customers would consider that these payments would be included within the PSA, particularly where these are received without deduction of tax given that TDSI interest would also be received gross under the new rules. If the tax deduction requirement were to be removed for bond fund distributions this would reduce the ISA10/ISA14 monthly/annual ISA reclaim for net payments which would reduce administrative burden on both ISA managers and HMRC. However, the ISA reclaim process would still remain for REIT PID distributions It is not clear what tax deduction obligations would arise in respect of deceased accounts and what the implications are for ISAs post death. RDR Rebates from funds which contain a trail commission (dirty funds) would fall under annual payments for which the fundamental considerations are highlighted in the consultation. However, the classification of these was always somewhat controversial and also brings about the requirement to apply BRT to a number of institutions that may not be required to perform this otherwise. Question Which of the issues identified in this consultation do you consider most important, and why? Comments on implications for particular kinds of non-tdsi income, or particular categories of payer or recipient are welcome. Please provide quantitative evidence where available. It is paramount that the final outcome of the consultation results in a regime that will be clear and simple, ensuring that customers can meet their obligations and enabling the banking industry to meet its too. The BBA considers that a critical issue is customer/taxpayer understanding; ensuring that customers/taxpayers understand when they need to complete self-assessment tax returns, particularly where they do not currently do so. Research undertaken for HMRC 1 in May 2015 suggested that customers do not currently have a clear awareness or understanding of taxation of savings interest, despite these rules having been in place for a number of years. We would expect that, in future, a scenario in which a customer might receive gross TDSI interest and net non-tdsi interest would create further confusion for many customers and that this might increase the risk that the customer/taxpayer becomes inadvertently non-compliant and fails to pay the right tax. Furthermore, increased taxpayer confusion would increase the burden on HMRC through handling of queries and chasing unpaid/incorrectly paid tax. From a customer perspective, regardless of the type of account they hold, they should be in a better position to understand their own obligations regarding the payment of tax due if all savings income and annual payments (i.e. reward payments) 1 f_savings_interest.pdf

3 3 are received gross, than if they had to deal with a mixture of gross and net interest calculations. A simple and consistent approach for TDSI and non-tdsi interest payments will help, as will digital tax accounts, which will automate the process and help FIs to ensure compliance. Equally important, is for FIs to be able to administer the scheme effectively and compliantly. The potential need to operate and manage different tax treatments for TDSI and non-tdsi interest represents significant complexity for FIs, which will be required to continue to deduct tax from non- TDSI payments (e.g. reward payments or compensatory interest payments to correct administrative errors which in both cases may be high in volume and relatively low in value). It should also be noted that the taxpayer may not in every case have a banking or savings account with the paying FI, for example where a customer has closed a loan account The administration costs incurred by Banks in withholding this tax and HMRC processing the refund due could outweigh the revenue gain to the Exchequer. It will be less difficult to explain to customers that banks no longer have an obligation to withhold tax at source, but the payments they have received may still be taxable with all the payments received (including reward payments) falling within the PSA exemption than if banks have to explain a mixed system. Any elements which do not have a consistent treatment will ultimately cause confusion for taxpayers. Question Chapter 4 sets out options for change. Which of those options do you think is likely to provide the best balance between? Administrative burdens and costs for payers of interest and other amounts; and s to HMRC of operating and policing the tax system? Please explain the reasons for your view. The BBA considers that Option 2 offers the simplest solution for the majority of customers/taxpayers who will not exceed their PSA. It provides a consistent approach to the taxation of all savings income paid by banks on deposit account products, thus making the taxation consequences arising on income received easier to understand and minimising confusion for customers/taxpayers. We summarise some of the advantages of this solution below: This is the simplest for customers/taxpayers. It removes the need to reclaim overpaid tax, unlike the other options, and removes the risk of potential confusion around receiving some payments gross and others net, which may lead customers to believe that they do not need to complete self-assessment tax returns. Recipients receiving taxable non-tdsi interest above PSA allowance are likely to be higher rate taxpayers who will have additional tax to pay anyway so would likely already be submitting tax returns so this shouldn't be much additional burden. A consistent approach will enable simpler and more effective customer/taxpayer communications, helping ensure customers know when they must complete self-assessment tax returns, particularly if they do not currently or if their marginal rate of tax changes during their lifetime. It represents a simplification of tax arrangements, which will be simpler for FIs to administer. For instance, Non-TDSI interest withholding is more likely to be managed via manual processes. Removing the obligation will ease the administrative burden on FIs. Also, the ongoing quarterly CT61 Return process, which will need to continue for non TDSI interest could potentially be demised.

4 4 The detail of interest paid is already provided to HMRC to aid correct compliance and this will complement the digital tax solution. Longer term objectives regarding digitalisation of tax returns would mitigate potential costs to HMRC of operating and policing the system. The other options add significant layers of complexity for customers/taxpayers, FIs and HMRC to understand, administer and police. We summarise some of their drawbacks below: Option 1: Retaining the current rules for non-tdsi interest will mean that customers/taxpayers could see a mix of gross and net interest and some will need to reclaim tax. It also makes customers obligation to notify income to HMRC less clear. Although higher rate taxpayers are more likely to receive non-tdsi savings income and would be more tax aware, it is possible that a significant number of basic rate taxpayers who would not ordinarily file a tax return will receive compensation interest e.g. in cases of PPI mis-selling. The main risk is that basic rate taxpayers who receive both TDSI and non-tdsi interest do not realise that there is an obligation to pay tax on TDSI interest exceeding the PSA and may not realise that they need to submit a self-assessment tax return. With a PSA allowance of 1000 on top of the ISA allowance, the number receiving taxable TDSI savings income may not be significant. This option would also mean that banks/non-bank subsidiaries would be required to retain existing mechanisms for deduction of tax on non-tdsi interest. Many of these are manual and carry more administrative burden than the TDSI mechanism, which is well established. HMRC would be required to process tax reclaims for tax withheld on non-tdsi interest received within the PSA. It is expected that this could be a significant burden in particular in relation to recipients of PPI redress due to the high volumes and increased likelihood that recipients might be basic rate taxpayers eligible for the higher PSA. Option 3: Removing the obligation to deduct income tax from non-tdsi interest paid to individuals only will require the need to distinguish the type of account for differing tax treatment and would be difficult to administer for FIs, particularly where both individual and company accounts are on the same system. Whilst this is similar to Option 2, regarding being simpler and clearer for individuals if they receive all interest gross, assuming trusts and partnerships would not be included as 'individuals' we can see possible scope for confusion where rules differ from those currently understood regarding TDSI. We would expect that UK trusts and partnerships would submit tax returns anyway, so it should be expected that those customers will pay the right tax on non-tdsi interest whether paid gross or net. The operational burden for FIs would remain in respect of payments to non-individuals where no exemption applies e.g. trusts and partnerships which are more operationally complex to determine tax status on. Option 4: Removing the obligation to deduct income tax from non-tdsi interest below a specified amount would create further complexity for customers and administration as it will require the ability to split types of interest paid into TDSI and non-tdsi interest on an account by account basis. We believe that this option would be excessively complicated for customers/taxpayers to work out how much further tax they need to pay. We consider that it is less likely that thresholds would approximate to PSA limits as customers would be likely to receive interest from a number of different sources. The administrative burdens and costs for FIs would be significant, requiring aggregation across a legal entity which would be operationally complex to implement given the number of different systems that could be involved. Also it is operationally complex to apply tax deductions other than on a blanket basis or by customer status as bank systems do not currently work in this way. A specified limit would only be applied at a legal entity level so HMRC would need to consolidate all income a recipient has received to understand whether there is additional tax to pay.

5 5 Paragraph 4.16 of the consultation says The obligation to deduct income tax from non-tdsi interest could apply only to amounts paid above a certain limit, which might be aligned to the annual amount of the PSA for basic rate taxpayers ( 1,000). This does not appear to consider the possibility that payments under any annual limit might be paid earlier in the year without knowing whether a further payment might be made later in the year which, in aggregate, would then mean interest paid exceeds the limit. For example if the limit was set at 1,000, an initial 'one-off' compensatory interest payment of 300 might be made with no expectation at that time of further payments being made, so it would be made gross. But later in the year a separate administration error by the same institution might result in a further compensatory interest payment of 800 being paid. If the tax treatment of the second payment had to take account of the first to establish the aggregate position that would be onerous and complex for institutions to administer, not least just to identify all payments made to the same customer across various business areas/systems. In any event irrespective of whether the second payment was made gross or net it probably would not arrive at the correct tax result overall, so customer contact with HMRC would be needed in any event to pay tax due or reclaim tax overpaid. Option 5: Allowing individuals to opt to receive interest with or without tax deducted would be overly complex for customers and FIs to administer, further compounded where joint accounts could require mixed treatment. Customers/taxpayers are also likely to have to seek advice on what is the best option for them. This would also appear to suggest introducing something similar to the R85 election process that exists today under TDSI but which is due to be abolished. This would not appear to represent a consistent and joined up policy approach. The lead time required for systems/process build and training staff/communicating to customers means that this is a significant undertaking. The cost and onerousness for FIs to implement and administer seems disproportionate, considering that most of the compensatory interest banks make to customers are one-off in nature, unlike interest paid on savings accounts today. If FIs had to contact customers to give them the opportunity to register for gross payment (or alternatively elect for net payment of compensatory interest) in relation to a one-off redress payment being made, for example in response to a complaint, this is likely to extend the length of time taken to resolve the complaint while awaiting a reply and may put the institution's compliance within FCA and FOS complaint handling rules and timescales at risk. This option does not appear to adequately consider that customers' tax positions are likely to change requiring them to deregister/reregister. In terms of risks to the Exchequer if the right tax is not paid this option possibly increases the risk if customers are less clear on what the default position is for tax deduction/what banks are required to do/what a customer can elect for. This option would reduce reclaims for non-taxpayers where tax deduction remains, and reduce tax amounts owed to HMRC by basic rate taxpayers where they have a tax liability to pay assuming that the customer understand the rules and take advantage of them appropriately. Option 6: Modifying the obligation to deduct tax from non-tdsi income is potentially a complex regulatory change which may take time and not necessarily deliver the simplicity of option 2. Without understanding what the modifications and wider changes might be it is difficult to give an informed view of the merits of this option. At a minimum, FIs would want to align to processes being implemented for the Common Reporting Standard, as far there are likely to be certification requirements. FIs would ideally want a blanket approach for any wider changes to achieve simplicity for systems/process implementation.

6 6 Question Of the options set out in Chapter 4, which is your preferred option or combination of options? Please explain why. Option 2 for reasons stated above. Question Are there are other options that should be considered? If so, please say what they are and why they should be considered. HMRC should consider:- a) removing the obligation from banks to withhold tax from reward type payments arising on bank accounts that are classed as annual payments and b) reclassifying reward type payments as savings income which benefits from the PSA. This would give a consistent approach to the taxation of all savings income paid by banks on deposit account products. Thus making the taxation consequences arising on income received easier to understand and minimising confusion for taxpayers. Question Chapter 5 considers potential impacts on payers and recipients of savings income, and on government. Do you have any comments on the assessment of impacts, either generally or in relation to the specific options set out? TDSI is well established and embedded into banking systems and processes. Decommissioning of TDSI is a significant undertaking and clarity on the changes to TDSI and other tax deduction obligations is required as soon as possible to enable sufficient lead time to implement these changes.. In relation to the comments at 5.7 regarding non-taxpayers and savers receiving interest within their PSA that would need to reclaim refunds, we anticipate that this number could be significant based on the number of customers receiving amounts of compensation interest less than 1k. There will therefore be an additional burden on HMRC to process these reclaims. Section 5.10 comments that banks no longer having to operate TDSI will reduce administration burden and costs on banks and that this should outweigh any remaining operational complexity if banks are required to continue deducting tax from payments of non-tdsi interest. It is worth highlighting that whilst TDSI requirements are largely automated, tax deduction on non-tdsi interest is generally via manual processes and as such these processes involve more administrative burden. Section 5.12 comments that removing deduction requirements would see a reduction in cost to HMRC in handling reclaims, but that this could be outweighed by an increase in costs arising from the need to operate alternative collection arrangements where there is a liability to tax on savings income. We would not expect there to be a need to operate an alternative collection arrangement specifically for non-tdsi interest and would expect that the arrangements that will be required for TDSI interest exceeding the PSA could be leveraged. HMRC seem concerned around the loss to the exchequer in respect of interest paid to non-uk residents. We would highlight that the R105 process (which could be applied to TDSI and distributions from AUTs and OEICs i.e. bond funds), currently operates on a gross domestic exemption basis to all non-residents who provide an R105 albeit not all non-uk residents may have taken advantage of this exemption. HMRC have therefore been benefiting where non-uk residents didn t take advantage of this. Removal of all tax deduction requirements could be argued as extending the R105 benefits to all payments of interest to non-uk residents.

7 7 The consultation document talks about non-uk residents being eligible for exemption from UK WHT or a reduced rate only under a double tax treaty. If it is intended that the gross domestic exemption is to be replaced with treaty relief then this will be an additional change in respect of those payments of non-tdsi interest for which a customer can R105 register currently and potentially might receive net of tax in future. Additionally, in Option 6 treaty relief at source for yearly interest payments and other payments is mentioned. It is not clear if treaty relief at source would be optional for FIs but would provide additional admin burden for FIs who offer this service to clients. We would not expect the number and amounts of compensation interest paid to non-uk residents to be material, but would need to validate this

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