- Joanna Rowland, Director General, Transformation, HMRC
- Jonathan Athow, Director General, Customer Strategy and Tax Design, HMRC
Paul Aplin: Hello, and welcome to a special episode of ICAEW Insights In Focus. I’m Paul Aplin. I’m a former president of ICAEW and currently a member of the Tax Faculty board. I also sit on HMRC’s Admin Burdens Advisory Board, and on the CFE Tax Technology committee.
The UK’s first electronic tax return was filed way back in 1997 – an event I remember well as I filed it. Over the quarter century that’s followed, we’ve seen technology transform tax administration, from the way we prepare computations to the way we file returns and forms, to the way HMRC receives and handles data. Some things have worked well – some extremely well – others less so. But the change in the way we do tax has been little short of a revolution, and it’s a revolution that’s been transforming tax administration not just in the UK, but around the world. Its pace and scale is increasing, moving beyond the digitalisation of tax returns and forms into whole new ways of handling and making use of data. Today we’ll be looking at some of the ways in which HMRC is using digital technology – not MTD, which tends to dominate any and every current discussion on tax technology, but some of the other things we should know about and be anticipating. Joining me are two people from HMRC I regularly discuss these issues with: Jo Rowland, Director General for transformation; and Jonathan Athow, Director General of customer strategy and tax design. They both sit on HMRC’s executive committee, and they both share my enthusiasm for digitalisation of tax administration.
I’ve said that most of what we hear currently about digitalisation in the UK is focused on MTD, perhaps naturally, but what we hear is almost exclusively about – if I can call it this – the front-of-house side of MTD, about MTD-compliance software and quarterly returns. What I’m interested in is what’s happening back of house. There have been concerns which I naturally share about data not being joined up across different HMRC systems; an example would be self assessment and the CGT property returns. So could you tell us something about how replatforming data for MTD is going to help you join up data internally more effectively.
Joanna Rowland: It’s interesting that you start with 1997 as our first step into digitisation. In that quarter of a century we have put a lot of technology in place, there are a lot of databases and, as it’s a quarter-century old, a lot of it is in need of replacement. So you’re absolutely right to say there is an enormous amount of transformation that isn’t visible to our customers or the outside world, but is fundamental to transforming a digital tax system. Some of the things we are doing include upgrading to modern cloud-based platforms; they have the agility to be more responsive, to compute in real time rather than in batches of data, and they are also more resilient and flexible. But it’s also what we hold on those platforms that needs the transformation: the way we hold our data, the way we protect our data in this world of increasing threat, but also the way we link our data so we get that complete picture of a customer and are able to support them holistically, rather than tax regime by tax regime. All of that equals our transformation, not just the front-end digital services, as you said.
PA: So this is really about moving away from having HMRC’s data in pots that relate to specific taxes, and more about having data held in a way that’s centred on the taxpayer. So perhaps we can look at a more personalised experience or service going forward?
JR: That’s exactly the ambition. We want a taxpayer to have all their information at their fingertips. And we want to use that to help them manage their tax affairs more easily, whether it’s through their agent or directly themselves. So, for example, most of the tax system is on a calendar base. Wouldn’t it be wonderful if not only is all the information available at your fingertips online, but also that online services support you to know what you need to do at what point in the year? Whether there is something that’s changed, whether there’s something that you might want to look at and just check that it’s correct? I think we can be far more supportive with our customers in a way that just isn’t possible on a telephony-based or one-to-one system.
PA: I know one of the vehicles you’re looking at to deliver this more personalised service is the idea of the single customer record and the single customer account. One of the things that really interests me about that possibility is how far you can go with pre-populating data into the single customer account. We have the opportunity to turn the tax system on its head – from me, as a taxpayer, sending you as HMRC my tax return with data on it, to a system where maybe you can pre-populate more and more sections of my tax return. Then I just need to look at it and decide whether or not it’s right. That seems to me to be turning the whole thing on its head, into something that’s potentially more proactive. How far do you think you can go in pre-populating data, and how many different data sources do you think you could obtain?
JR: The possibilities are infinite. The amount of data now available electronically means there is a wealth of opportunity available to us to help the customer pre-populate and understand their tax affairs. However, there is some caution here. Not all data is as accurate as it would need to be. Some data sources have a caveat about how they’re collected, therefore we need to make sure that while we’re exploring this wealth of opportunity, we’ve got a conscious eye on the provenance of that data. Because the one thing we cannot compromise on is quality; that could make it more confusing for the customer than helpful. But we are so excited that the tax system has this possibility and it’s something we are actively exploring every day. Most recently, we’ve linked up with open banking. So we are sharing data between ourselves and bank accounts to make it much easier to pay your self assessment bill, as I did mine only a few weeks ago – it was literally two clicks on my iPhone and my bill was paid.
PA: One thing I’ve read about regarding HMRC’s use of open banking is that you found it much easier to allocate payments to the right account. In fact I’ve read, I think, that you’re finding open banking allocates tax payments with almost 100% accuracy. Is that right?
JR: Yes, we’re really pleased with the results of open banking and its possibilities. Because it’s coming from the account that needs to be paid and it’s pushed out to a communication direct to the bank, it’s far more accurate. It’s reduced any scope for human error, computation error, etc. That’s exactly what we need to do more and more of in banking – not just the banking system, but the tax system – in that we need to make sure we are eliminating as much opportunity for small errors as possible, so the customers can feel confident that when they’re transacting with us, they’re getting their tax right.
PA: If we were to get to the point where my tax return is completely pre-populated, I just log on to my HMRC app and there are the details of all the information you’ve received from third parties or that I’ve filed through MTD, and I look at it and I think, “That’s OK,” I press the button, that’s my tax return done – do you think there’s a risk that you could end up making it so easy for the taxpayer that I don’t bother checking that data? I just press the button? Where do you think the responsibility then lies for the decision that this return is correct? How much is with HMRC for pre-populating the data? How much is with me as a taxpayer for checking it rather than just thinking: “Yeah, it must be OK.”
JR: Jonathan will probably say more about where the policy thinking is going on this topic because it is very complicated. Our design principle is that the customer is still required to be involved in their tax affairs. This cannot be always automated. It’s a bit like your bank account: many people do not check their bank account thoroughly and therefore are not always aware if something has gone wrong or a transaction has come in incorrectly, or a piece of third-party data has come in and it needs rectifying. So just as banks recommend that all customers check their bank statements thoroughly, we are very much in that position regarding your tax affairs and taking an interest is the easiest way, particularly as we rely on more and more third-party data. So, for example, in the PAYE system – it’s a fantastic system, it makes tax easy for so many – but occasionally there is an error in reporting from an employer or a time lag in a piece of information. That’s when people can get a bit of a shock in their pay packet. We want to help make tax easy through the digital system. But also, we want it to be easier for the customers to converse with their tax affairs, to understand them, and therefore have a much greater eye on making sure it’s correct.
PA: Jonathan, thinking about how things have changed over the 25 years, it’s not just tax technology, it’s not just the way we file returns – a lot of things in society have changed, the way we do business has changed. Around 15% of adults operate through platforms. I wonder if I could just take one example and ask you how you think digitalisation could help the individual? Take the fast-food delivery rider. Maybe English is not a first language for some; maybe a low income for many; and maybe there’s a nervousness about dealing with authority, because in the past they’d been on PAYE and hadn’t had to. Suddenly they are – perhaps I can use the term ‘accidental taxpayers’ – but they still have an obligation to file a return. Do you think there’s any scope for technology to help people like that to comply with their obligations in a lighter-touch way?
Jonathan Athow: There are a few points I would bring to bear on this. First, we’ve always had low-income taxpayers who needed to interact with us in one way or another – our customer base is very broad. If you went back to 1997, there would have been lots of mini cab drivers and things like that, well before we had platforms and those sorts of issues. So it’s really a question now of scale, and how ubiquitous some of these platforms are. And actually, the technology underpinning those platforms is, in many ways, an opportunity for us. Because every time a job is done, every time a fast-food takeaway is delivered, that’s recorded on the platform’s system. So it creates an opportunity for us to access that data and there are different ways we can use that data. Jo has already talked about pre-population and whether you would want to go that far. But it can also be used for us to maybe nudge people if we think there are missing parts in their tax affairs. So there’s a real opportunity that data collected by these platforms themselves becomes very valuable. There’s work now across the OECD to put in place a framework for sharing that data, so we can get access to it and use it to help people to pay the right amount of tax.
PA: An idea that really struck me as being potentially transformational was one I came across in the Russian tax system, where small entrepreneurs can now have a tax authority app on their mobile phone. If they make a sale, they can generate the invoice on their mobile phone, transmit that to their customer and their customer can pay them electronically. But a record of that invoice automatically goes to the tax authority, which calculates the tax and pops that figure back to the entrepreneur. What really struck me about that is we think of income tax – the tax that self-employed people pay – as an annual tax, because it’s always been based on a set of accounts. But what they’re doing in Russia almost seems to be changing that annual basis of assessment for income tax into a transactional tax. Perhaps this is only something that would work for smaller businesses? Do you think that idea of moving from an annual tax to a transactional tax with income tax is something that could ever work here?
JA: In some ways, we already have features of that through the PAYE system – we have a system that calculates tax in the year and then collects that at each pay period, then there’s a reconciliation at the end of the year. So I think these hybrid models are perfectly possible to have. I think there are good reasons for keeping tax systems on an annual basis, even if you want to have more regular data – and more regular data is very important for a tax administration. And I do think there are wider benefits sometimes to these ideas of collecting tax in a transaction.
There are a number of stages that tax authorities really interested in. We’re interested in data when the transaction arrives, and the longer the gap between the transaction and having data on that transaction, the more chance there is that somebody forgets it or records are not kept or not kept well. Even better is, can we get payment close to the transaction, because that avoids the build-up of debt and debt can sometimes not be collected. So it avoids that problem. Having a third party is always a good thing for a tax administration: we’re not relying simply on the taxpayer, but we can rely on somebody else to provide that information. Even better is, where that money is withheld before it gets to the taxpayer, so we get the money and that really reduces the opportunity for money to not find us. Those are the things we talked about, those are the characteristics we would look for.
Exactly how you would apply it, I think is very different according to the tax system you’re in, according to the technology you have available. But it’s beneficial for us. But sometimes, it’ll be beneficial for the taxpayer as well. People are thinking about how they manage their cash flow and for them, there might be a benefit in paying us as they’re going, so they don’t end up with a large bill at the end of the year that they will then have to pay. So there are lots of opportunities here, and lots of the areas we’re thinking about take us into that sort of territory. Even things like open banking – the more you can think about that data, the more you can think about where you collect the information, where you collect the tax. There are lots of opportunities here. Financial technology is changing and we need to be keeping up to speed with that and thinking about what the opportunities are.
PA: If I could just pick up on two points. One is this almost irresistible move – I hesitated on saying ‘almost’ because I think it is an irresistible move – to more real-time data, to recording transactions closer to real time, in order to improve their accuracy. But also, as you’ve rightly said, to give businesses better, more accurate real-time data so they can take better decisions. That, I think, is really important. Another point you made, thinking back to the delivery driver, was the opportunity to put prompts and nudges into tax compliance software. For me, that’s one of the big opportunities, one of the things that could help people see the tax system helping them rather than try to catch them out – just that little nudge.
Something that came up in a Q and A session I was doing recently was a question about what happens if a business misses the fact that they should have registered for VAT. Who’s responsible – the business or their accountant or bookkeeper? But the question in my mind wasn’t who was responsible? It was couldn’t you put a very simple tool into accounting and bookkeeping software that keeps track of your sales and, if you’re not VAT registered, gives you a prompt. What really shocked me was very few products have that very simple prompt built in. And I’m sure there are more things we could think about that would be really helpful. We could think about the new penalty point system, and how big a role there could be for technology in helping taxpayers navigate that. Do you think there’s a role for technology in helping people to navigate the new penalty system?
JA: We’ve only really scratched the surface of the use of technology. With technology provided by HMRC, we’ve got a wide range of offers now. We’ve got the HMRC app on people’s phones, which provides data in one place, and there’s no reason why we can’t use some of the functionality of phones now with reminders and those sorts of things – build those into the app. There are lots of opportunities with the technology we have, but also with the other technology people use. We’ve also only really scratched the surface of how we build our relationships with the software industry and think about the opportunities there.
Of course, accounting software and tax preparation software has been around for a long time. But there’s an opportunity now, through some of the things that Jo talked about in terms of bringing data together and looking at taxpayers’ affairs in the in the round. It would be good if we could have that nudge – here are the things you are likely to need to do over the next 12 months: in three months, you need to file this; in six months, you need to need to do that. It would be much clearer for people, to help them understand where they’re at and where they’re complying. Give them a nudge when they get close to thresholds that mean they might have to do some something different. I think there are lots of opportunities there. There’s a question of how much we build it ourselves, and how much we look to the software industry to do. But I think it’s a rich vein. The challenge is making certain we don’t create an impression that taxpayers can simply rely on these things; they will need to check them, they will need to make certain things are right and take responsibility for that. We’ll need to get that balance right in terms of how we get those prompts and nudges to work.
PA: There are two areas raised that I wanted to touch on. When we’ve looked at how we tax, I think over the next few years and certainly over the next quarter century, we’re also going to be looking more at what we tax. One big change we’re going to see is the shift from petrol and diesel cars to electric. Petrol and diesel raise a lot of revenue through VAT and duty; we’re going to have to think about how we tax electric vehicles. Do you see technology changing the way we do that – perhaps on a per mile travelled charge, perhaps dependent on the road we’re on, how busy it happens to be or even the time of day? Is this something HMRC is thinking about?
JA: There are a number of tax bases, and probably two main ones, that I can see eroding, and you’ll need to think about what you would change. One of them is tobacco. But the other one, as you say, is road fuel duties. I think there’s a wide range of options around what you might want to do in its place. Do you wish to go for a per mile charge? Do you want to do something else in terms of taxing ownership or the electricity that is used to recharge electric cars? All of these things are being discussed. But technology does allow you, now, to do many more interesting things. GPS technology allows tracking of vehicles, and we have number plate recognition. A lot of that infrastructure is now being built: many cities now have clean air zones, so people are being tracked and sometimes charged for access.
Again, there’s a question – and this is a public policy question, not simply an HMRC question – and it’s what do you want to achieve through your tax system? When I look at road fuel duties, yes, it’s there to raise revenue and, as you say, a substantial amount of revenue. But it’s also there to deal with the negative externalities, too, as the economists would say, of road fuel use. So you really have to think about not just where you’re raising revenue, but also what are you trying to do? Are you trying to tackle congestion? Are there other things you are trying to do with any replacement that might come along for road fuel duty?
PA: That leads me on to the final point. Looking at the OECD’s recent paper ‘Tax Administration 3.0’, one of the themes is moving closer to real-time data, but another is embedding compliance into the taxpayers’ own systems – into their software systems and their recording systems. I can see huge advantages to building in prompts and nudges – for example, as we talked about, when you’re getting close to a VAT registration threshold and you need to take some action – that would be a positive. There are some compliance rules, but they would be totally uncontroversial. There are others where perhaps HMRC’s view is different to the view of a lot of tax professionals, and is a bit of a grey area. There are going to be questions about what rules should be embedded and how transparent they should be. Picking up on how you raise revenues from electric vehicles with technologies like GPS or number plate recognition, and compliance built into taxpayer systems, do you think we need some kind of public debate on how far this goes? I can imagine some people listening to this will already be thinking, this is Big Brother. But is Big Brother trying to catch you out, or trying to help you? How do you think we should have that debate on where the balance lies between intrusive and helpful?
I think it’s a really good question. In the world of tax, we’re talking about the issue of how data is used, and people’s attitude to use of data and sharing of data. But it’s much wider than that. It’s across government issues, but it’s also an issue with the private sector as well. There are lots of different elements to this. I think the key issue, and the one I’m very keen about, is being very open and transparent about it. If you’re going to use data, if you’re going to be embedding rules in systems, I think you need to be very open and transparent about that. And you need to not rush ahead of public opinion – you need to be very sensitive to it. I think there are examples of poor practice in data-sharing in this country and others, where you will see that people have got out of step with public opinion. That leads to lots of difficulties. So I think it’s absolutely right that you need to keep having this debate.
But it will constantly change as well. Technology offers you new opportunities: things you could not have done a few years ago are now much easier to do. And just because you can do it doesn’t, of course, mean you should do it. So I think there is a real need to have this constant debate about how data is used, how we are using new technology, artificial intelligence, machine learning – all these new technologies. How we use them in the tax system, and how we use them more generally in society, is a really important question if we are to make certain we get good results out of them and don’t fall into some of the traps this technology can lead you into. There are good examples from the Netherlands and from Australia, where some of this technology produced outcomes that people were not looking for, really unintended consequences that have damaged trust in the system. One of the key things for me, and a word that’s really important in our vision, is that we need to be trusted – people need to trust us that the data we have on them will be protected, confidentiality of taxation will be protected, but also that we will use data in a sensible and proportionate way. Trust is a really important issue. And I think it cuts across lots of the different elements of the agenda we’ve talked about in terms of balkanisation and technology; making certain you have a trusted system and that we are seen as trustworthy, I think, is really important.
JR: Jonathan has hit the nail on the head with trust. And the basis of trust is that our customers perceive our actions to be proportionate and fair. I think there is a huge amount we can be doing that is not at all controversial, because the evidence base would be an area of the tax system that our customers find confusing, or is an area where most mistakes are made. Simple nudges and prompts are a hugely helpful thing that we can be doing while we’re having that wider debate that Jonathan states. I think the really important thing in all of this is to keep the experience of our customer in our mind. The last thing any of us want, and we’ve all got websites that do it to us, is having 300 emails popping up a day or your iPhone. So we need to make sure we are using and leveraging technology to help our customers. But we must keep the ultimate aim of all of this in mind, which is to make tax easy and to help our customers get that tax right.
PA: And to go right back to the start of this conversation, to put the taxpayer right at the centre?
PA: I guess this is the right place to wrap things up for now. Jo, Jonathan, thanks for sharing your insights and ambitions today. What’s very clear from this conversation is that the next quarter century is going to be just as transformative in terms of digitalising tax administration as the last 25 years have been and – well, who knows what tax administration is going to look like in 2048?