In a recent report, the Tax Law Review Committee called on HMRC to take a more active role in setting standards for tax software. Stephen Relf looks at the case for change.
Online filing has become the norm, as made clear in a recent report published by Tax Law Review Committee (TLRC). All VAT, pay as you earn and corporation tax returns, and almost all income tax self assessment (ITSA) returns, are now filed online, with third-party software used for approximately 90% of all tax filings. ITSA is the only major service where the HMRC portal is the main method of filing a return.
HMRC’s third-party software strategy has played a key role in this. Published in 2015, the document commits HMRC to growing the market, stimulating demand for software and increasing efficiency. However, TLRC believes that more can be done to improve and encourage online filing and recommends that HMRC:
- takes the lead in setting standards for software used to file returns and for holding taxpayer data;
- improves its engagement with software developers;
- makes it easier for taxpayers and agents to access information and file returns; and
- clarifies its position on errors in returns relating to the use of software.
The report also makes extensive reference to feedback from agents, providing more food for thought for HMRC on how it can make the system work better for all involved.
New standards for software
Currently, software developers must follow minimum functionality standards and sign up to terms of use for some of HMRC’s services. HMRC does not review third party software in detail and does not monitor compliance with the terms of use. TLRC recommends that HMRC develops a set of core standards, which it can add to for particular markets and types of software, and that it monitors compliance with those standards.
To address the risk of underlying taxpayer data being lost, and to ensure that data can be transferred quickly and easily between software products, TLRC recommends that HMRC also considers setting standards for holding taxpayer data. HMRC is encouraged to discuss the issue with software developers with a view to agreeing and mandating standard formats for data. ICAEW would also encourage HMRC to extend the discussions to include issues around the transfer of data when a taxpayer moves from one agent to another.
TLRC does not recommend that the government includes software companies in its plans to regulate the tax profession. However, it does recommend that software companies are required to register with HMRC.
Improved engagement with developers
TLRC recommends that HMRC increases the size of its dedicated team working with software developers, enabling all software providers selling commercial software to have a designated contact within HMRC. Given the number of developers operating in this space, this could be a significant challenge for HMRC but closer engagement with developers should benefit the tax software market as a whole. Taxpayers and agents should have confidence that software companies have the resources to support their products going forward. This is of particular concern where the developer is a one-man band. New standards from, and improved engagement with HMRC could help with this.
Taxpayers and agents should have confidence that software companies have the resources to support their products
HMRC has been successful in developing application programming interfaces (APIs), which can be used by software to connect with and send/receive data to/from HMRC. However, there are issues with consistency and feedback from software developers is that more APIs should be offered by HMRC. TLRC believes that “externally available APIs should be the default” and that this will help grow the software market and improve tax filings. It may not be commercially viable for software companies to develop products in all instances. Where this is the case, HMRC should commit to providing an efficient service for taxpayers and agents.
TLRC notes that HMRC has not always given developers sufficient notice of technical changes in the past, with the result that updates to software did not work as intended (eg, basis period reform).
Improvements for taxpayers and agents
TLRC recommends that HMRC:
- ensures it has capacity to receive all tax returns submitted online. Feedback received by TLRC suggests that, at peak times, it can take several hours from filing a return to learning whether it has been successfully received;
- makes more taxpayer information available to taxpayers, agents and software developers;
- consults on a range of easements for micro-businesses, including allowing the recording of net payments from specified platforms;
- gives agents greater clarity over who they should contact where there is an issue with HMRC software. Figures obtained by TLRC show that agents used HMRC’s software to submit 733,235 ITSA tax returns for 2023/24, 11.15% of all ITSA returns submitted by agents that year;
- creates a process for HMRC, software developers and the taxpayer or agent to work together to resolve difficult cases and software issues;
- explores how best to understand the competence of individuals maintaining their own accounting records. TLRC notes that setting standards for individuals undertaking bookkeeping on which submitted accounts for tax are based is common in other countries; and
- considers requiring disclosure of software used in preparing tax returns.
Software developers are encouraged to provide more support to taxpayers and to tailor that support based on the person’s experience and competence. TLRC says that in compiling the report, the most common error identified was “double counting purchases through both downloading bank data and entering purchase invoices”. It is suggested that “this could be prevented with controls over matching and the possible use of AI to prompt users to clarify similar or identical amounts”.
New guidance on errors
The taxpayer is responsible for ensuring that all information they submit to HMRC, or which is submitted to HMRC on their behalf by an agent, is accurate. Occasionally, there may be an issue with the software used to submit the information. TLRC recommends that HMRC publishes guidance on the circumstances in which it will accept that the taxpayer has taken reasonable care in the event of a software error.
TLRC had also considered whether the relationship between the agent and the software provider should be rebalanced, with the software provider taking on specific responsibility for the tax accuracy of the software. However, it found that there was “no appetite for change” among agents and the professional bodies: “They and the software developers felt that the status quo, where problems are dealt with through the commercial relationships and pressures, was working satisfactorily, especially as tax inaccuracies are relatively uncommon.”
Feedback from agents
Agents raised a number of frustrations with the current system, including that:
- there is uncertainty as to whether attachments filed as part of a tax return or filing have actually reached HMRC. This a particular problem for corporation tax as the corporation tax return does not have an additional information section;
- HMRC’s online services for agents are inconsistent and confusing, for example, the agent services account (ASA) requires a digital handshake between agent and client, but the authorisation processes for HMRC online services for agents vary from service to service;
- a firm can only have one ASA. This is less flexible than HMRC online services for agents, which allow the firm to set up different accounts;
- some functionality available to taxpayers is not available to agents, for example, agents cannot file R40 repayment claims online; and
- the information available to agents does not replicate the information available to their clients.
MTD and the need for change
The case for change is all the more pressing thanks to Making Tax Digital for income tax (MTD income tax), which will see many people come into contact with third-party software for the first time. At the time the report was written it was estimated that 780,000 taxpayers will join MTD income tax from April 2026, 970,000 from April 2027 and 950,000 from April 2028. In the words of TLRC: “The imminent use of software by some 2.7 million individuals to report their income from self-employment and property rentals is a useful catalyst for considering a new approach to software standards.” Figures published recently suggest that around 2.9 million individuals will have to comply with MTD income tax.
Making Tax Digital for income tax will see many people come into contact with third-party software for the first time
Preparations for MTD income tax have highlighted the need for transparency over what functionality is included in available software. Taxpayer needs can differ significantly depending on their circumstances and with so many permutations possible it is not clear if HMRC’s software finder tool will be able to give a complete answer, even when fully developed. Even software developers may not always be able to give a clear answer as they may not have made a final decision on what they will develop.
It is also important that self assessment taxpayers not in MTD for income tax are not forgotten. TLRC recommends that HMRC continues to develop APIs for those not in MTD for income tax who will still file an ITSA tax return.
Stephen Relf, Technical Manager, Tax, ICAEW
Further information
TLRC was created by the Institute of Fiscal Studies in 1994. Its remit is “to keep under review the state and operation of tax law in the UK”. TLRC’s funders include ICAEW. Read more about TLRC.
