Paul Aplin, a member of the Tax Faculty Board, focuses on the digital interface between taxpayers and tax authorities.
Writing in TAXline last year about my report for Tolley, The Tax Technology Horizon (August 2021), I compared the impact of digital technology on tax compliance with its impact on photography. My second Tax Horizon report focuses on the digital interface between taxpayers and tax authorities. Once again, I feel the need to reach for my camera bag.
Macro vision
A macro lens is best for fine detail, but it has its limitations. Some years ago in Nepal, a fellow trekker was using a macro lens to take a close up of a very large spider. “This thing’s enormous,” he said, squinting through the viewfinder to frame the perfect shot. “Not,” his companion said, “as enormous as the one on your T-shirt.” It would have been a great shot if he hadn’t dropped the camera.
You need a variety of lenses, from wide angle to telephoto, to take in both broad landscapes and distant objects. I have tried to use both when looking at the interface between tax authorities and taxpayers.
So much of what I currently read about tax technology is focused on the detail of Making Tax Digital (MTD). We risk missing the importance and potential impact of other developments that are happening in parallel.
From Chancellor George Osborne’s announcement of the “death of the tax return” in March 2015 to MTD for income tax self assessment actually going live in April 2024 will be just short of a decade. That is a long time in technology, in tax and indeed generally. Much has changed and more will change before MTD has been fully delivered.
The story so far
The shift to digital has transformed tax administration over recent years. For taxpayers and businesses that transformation has largely been characterised by the digitalisation of tax returns. It has had its successes (with well over 90% of self assessment and business tax returns now filed online) and its disappointments (such as new systems not connecting to existing systems).
Tax technology is already making greater use of data and over the next few years we will see that process accelerate.
This increased focus on using – rather than just transferring – data takes us in several directions: greater use of technologies such as data analytics and artificial intelligence; recording transactions closer to real time; integration; adapting to changing circumstances; tax sensitisation; personalisation and building in features to assist compliance.
Getting real
One of the core objectives of MTD is to bring the recording of business transactions closer to real time, the hope being that the accuracy of recording will increase and the level of error will decrease. But MTD quarterly reporting does not take us as close to real-time recording as the December 2020 OECD report Tax Administration 3.0 aspires to. Moving recording and reporting much closer to real time could radically change the tax administration landscape.
Some transactions could, for example, be shared automatically and instantly with HMRC (and some tax authorities have already proved that this can work). This could facilitate split payment processes (where VAT could be separated from a sales receipt at the point of transaction); it could give HMRC a chance to intervene or to validate a transaction in real time or simply create greater transparency. Such a ‘glass box’ approach would obviously bring with it new concerns over confidentiality and the intrusion of Big Brother.
Real-time recording and reporting could also create the opportunity to radically rethink some taxes that are currently based on periodic reporting. In Russia, for example, the tax authority has introduced a simplified flat-rate tax for some forms of self-employment income. Those within the scheme can render an invoice digitally on an app and share the transaction automatically with the tax authority. The app shows the tax due and by storing bank card details it can facilitate the automatic payment of the tax as well as generating a certificate of self-employed income to support a loan application. It is an example of a tax that has historically been based on a set of accounts being based instead on individual transactions.
I can see significant potential here for transforming the way nano- and micro-business and people within the platform economy engage with the tax system.
Getting personal
For me, this is one of the most exciting opportunities offered by digitalisation. If we refocus from MTD in the foreground to what sits behind it – or more accurately what it sits on – the image changes. MTD sits on HMRC’s Enterprise Tax Management Platform (ETMP). By bringing more taxes and information on to ETMP, more opportunities are created to join up data in a way that is centred on the taxpayer, facilitated by the creation of a single customer record (SCR) to power a single customer account (SCA).
The idea is that the individual taxpayer will be able to see the information that HMRC holds about them and which can be used to prepopulate their tax return. The Office of Tax Simplification – most recently in its Evaluation Note on the Single Customer Account – has described the SCA as being “at the heart of the government’s 10-year strategy for tax administration reform and is the keystone that will lock all the other pieces into place”. The vision is for HMRC to receive and bring within the SCA increasing amounts of information from other sources, such as interest, dividends, income data from investment managers, pension premiums and gift aid payments. Australia, Estonia, Ireland, the Netherlands, New Zealand, Russia and Singapore all partially prepopulate tax returns, so the UK would be following a well-trodden digital path.
Personalisation via the SCA or an app could also make it far easier for people to claim straightforward allowances (avoiding the need to use high-volume repayment agents) and to receive proactive compliance prompts from HMRC. As one of my Tax Horizon interviewees said, personalisation is about making the tax administration process more of a service, less of a ‘gotcha’ experience.
Adapting to change
Society and the way we work are changing. More than 15% of working adults are now paid by platforms. Many are on low income and have multiple engagements. Technology can and must be harnessed to make navigation of the tax system as simple as possible for those individuals.
As drivers look to electric rather than petrol- and diesel-powered vehicles, fuel duty and related VAT receipts will fall. New ways of taxing vehicle use will emerge and technology will be a key enabler, whether by taxing on distance driven, electricity consumed or timing of battery recharging.
And as Jane McCormick said in her Hardman Lecture last year, technology could make consumption taxes far easier to deliver and harder to avoid.
The right lens
In this short article I have not had room to touch on open banking, distributed ledger technology, tax sensitisation, artificial intelligence, cross-government data sharing or the world of central bank digital currencies, but all are covered in Technology and Tax Administrations. Collectively – and in some cases individually – these innovations will transform the tax landscape over the next few years.
We still need the macro lens (tax people are detail people after all), but should never forget the wide angle. There is too much out there that we cannot afford to miss. And however surprising some of it might be, we need to keep hold of the camera.
About the author
Paul Aplin is a member of the Tax Faculty Board and was ICAEW President in 2018/19