‘Tax conditionality’ is a new HMRC policy being brought in as part of their strategy to tackle tax avoidance in the hidden economy. It means that renewing some mandatory operating licences will be conditional on proper registration with HMRC.

Who is affected by this new tax conditionality policy?

You will need to comply with this new tax registration check when you renew the following licences:

  • Scrap metal dealer site licence
  • Scrap metal mobile collector licence
  • Tax diver licence
  • Private hire vehicle (PHV) licence
  • Private hire vehicle operator licence

This applies to everyone in England and Wales from April 2022. The expectation is that this will come into practice in Scotland and Northern Ireland from April 2023.

How will it work?

Usually, local authorities are the licensing bodies for these types of licenses. When you apply to renew your license, you’ll have to complete HMRC’s online tax check. The authorising body will need to confirm its completion with HMRC before they grant your licence renewal.

This isn’t a compliance check. You don’t input your Unique Taxpayer Reference (UTR) number from your self assessment tax return and you don’t enter your employer’s details.

It’s about making sure you’ve got the correct tax status. And is an official declaration that you’re reporting your income to HMRC in the correct way.

Among other things, the tax conditionality check asks if you’re an employee, self-employed taxpayer, or combination of the two. You can say that there’s ‘no notification necessary’, if that fits your situation. And, if you pay tax through the self assessment process, it asks you to confirm that you report the income from your license-related work on your tax return.

Once you’ve completed this form you get a ‘tax check code’ which you have to include in your licence renewal application.

If you’re applying for your licence for the first time, you don’t have to do the tax conditionality check. Your licensing body is expected to ensure that you know where the HMRC guidance is, so you can be fully tax compliant.

Why is HMRC bringing in this new policy?

HMRC acknowledges that “the majority in these sectors already pay the tax that is legally due.” And they are “disadvantaged, or undercut, by those who don’t.” This idea of tax conditionality is one part of HMRC’s plan to get rid of the ‘hidden economy’ – where businesses’ and individuals’ incomes are hidden from HMRC. Government estimates put this lost tax at £2.6 billion in 2088-19 tax year. A substantial loss to the public purse.

As explained in their ‘HMRC issue briefing: hidden economy conditionality’ policy paper: “Conditionality is a proportionate and cost-effective way of moving people – some of whom simply don’t understand their obligations – out of the hidden economy. It complements existing licensing rules, and recognises that third parties play a vital role in helping people pay the right tax – as referenced in the tax administration strategy.”

Are there any issues with this new policy?

The ICAEW has raised an important issue with the government about this new policy. At the moment, there is no capacity for your tax agent or accountant to complete this form on your behalf. Leaving you to work through it all yourself. Depending on the complexity of your tax position, this may lead to unnecessary mistakes and a delay to your licence renewal. For example, you trust your self assessment tax return submission to your tax professional and so don’t have a full grasp of all the details.

HMRC’s response:

“Because of the simple nature of the check and its link to licensing processes, the design of the service does not include an option for agents to complete the check on a client’s behalf.

“We would expect agents to be involved in wider processes linked to the tax check. For example, this may include agents’ supporting customers who need to register for the appropriate tax.

“HMRC is continuing to design the new service and has carried out user research with agents to enable them to see the prototype in development. The idea of the service was well received by the agents who participated in the user research, and the large majority believed that their clients should be able to do the tax check on their own.”