Is tax too complicated to go digital?
Retired tax adviser, member of LSCA Tax Committee, elected member of Council 2017-21 Michael Quinlan weighs in on tax digitalization.
Most practitioners will have experienced delays at HMRC that have exacerbated during the last year. HMRC has acknowledged that in many areas response time has missed service standards by a wide margin. Most of us find this understandable as the Treasury drives down costs and staff levels. Continuing COVID restrictions will likely continue to cause additional difficulties.
In March HMRC issued ‘The Tax Administration Framework: Supporting a 21st Century Tax System – Call for Evidence’. This paper follows an earlier one issued in July 2020 that proposes top to bottom changes in tax administration. This initiative would have incepted well prior to the onset of the pandemic and whilst the Revenue was under much less stress. The right course of action now is to delay the project until everybody, not least the Revenue, is on a firmer footing.
The proposals are radical and wide ranging, including extension of taxation based on real-time information, full roll-out of MTD, pre-population of returns, comprehensive new digital systems, raising the standards of the agents and intermediaries, closing the ‘tax gap’, earlier and more frequent tax payments. Some may be concerned. Some may be alarmed.
It is intended all this will be achieved with new integrated digital systems. The stated dream is that ‘For the vast majority of taxpayers, calculation and payment of tax will be effortless’. This is not the experience so far. Digital implementation has been poor. There have been teething issues that have caused difficulty and expense for many taxpayers. Additional commercial software has had to be purchased when initially it was represented that free software would be available. But this is not the way HMRC sees it: ‘Taxpayers regularly highlight how much they value greater ease of doing business with HMRC’. I wonder who these taxpayers are.
But the complexity of tax rules creates far more problems than outdated systems. In the relatively simple computerisation projects undertaken so far, most of the bugs and failings arise because of the tax system and less because of poor implementation. In just one area, consider the calculation of personal tax subject to interaction of reliefs and social security, piling on of special rules for residential lettings, tapering of personal allowances and reliefs, differential treatment of various types of investment income, IR35 and more. It is very hard to build digital systems that can cope with all these interacting rules.
In some instances a solution is not possible. Digital cannot address major structural issues like IR35, where the answer lies in simple economics, hard choices and biting bullets, not computerisation.
In recent years the volume of tax legislation has bloomed like a plague. Finance Bills are regularly 700-1000 pages long, full of complicated new provisions that will throw spanners into any computer. Every year major adaptations must be made to what should be steady state, like self-assessment returns. Every year this creates more bugs. What is needed is a thoroughgoing simplification of tax. On this, the remit of Office of Tax Simplification is nowhere near wide enough. All the earnest efforts of its members have not achieved much. Rather than promise no increases in major tax rates for the life of this parliament; government should promise no tax system changes.
HMRC continues to set great store by the ‘tax gap’. At present they state it at 4.7% or £31 billion, or less than 10% of the COVID related government expenditure so far. I always wonder how they get the figure. Because the tax gap is the tax due that they fail to collect. But if they fail to collect it, how can they know how much it is. Perhaps they can tell us. HMRC has a belief that digitalisation will reduce the tax gap. They believe many businesses registered with them understate their income, often in error, and MTD will stop that. But surely most of the tax gap is represented by activities that are not registered with them or reported to them at all?
We are a fifth of the way into the 21st century. I expect to be a lot further in before all this is working effectively. But for now the operation should be halted, to re-start at a time when everyone has the capacity to assimilate it.