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Imagine no brown envelopes in your letter box. Imagine logging in to an online account to check your taxes. Imagine apps that silently pass on your information to the government.
HM Revenue & Customs can.
The authority’s digital strategy is not just about hauling the organisation into the modern era. It is about bringing hard cash into the exchequer’s coffers.
Minimising the amount of tax lost each year through individuals failing to pay what they owe — the so-called “tax gap” — is a key objective of the digital push, which promises to bring about no less than the end of the annual self-assessment return.
The authority hopes it will usher in an era of seamless interaction with its “customers” (or taxpayers to the rest of us), for whom personal online tax accounts will bring an unprecedented level of visibility to their affairs.
But the journey towards what George Osborne, the chancellor, called “a revolutionary simplification of tax collection” is unlikely to be plain sailing. Not only are there public concerns about access and security, but the technical challenge of bringing together taxes in one place must be navigated.
Against the backdrop of austerity which has forced the authority to shed two in five of its staff, and criticisms of the support taxpayers are receiving, HMRC must walk the tightrope of becoming a digital organisation without undermining public confidence in the tax system.
The digital vision
HMRC has said that at the heart of its changes is the “recognition that customer service and compliance are two sides of the same coin”. By making it easier for taxpayers to report their affairs correctly, the scope for error and evasion will be reduced.
The ultimate goal of a drive to simplify the system is personalised online tax accounts for all individuals and companies. Like an online bank account, people would be able to log in and check their up-to-date liabilities and payments. Information would already be filled in, with data relating to different taxes inserted automatically.
While at this stage an ambition, tax professionals agree it is promising. “If it’s done well, it should be really quite advantageous for taxpayers as well as HMRC,” says Chas Roy-Chowdhury, head of tax at the Association of Chartered Certified Accountants.
Progress towards digital taxpayer accounts is already under way, with limited filling in — or “pre-population” — of online self-assessment returns starting this year.
At first this will only extend to information included in a P60, the end-of-tax-year summary of PAYE (pay as you earn) income and tax deductions, but further fields will be incrementally pre-populated towards 2020, when 12m or so self-assessment taxpayers have been promised an end to the annual ritual of filling in a return.
“The idea of more pre-population is very welcome, and a very good use of technology,” says Paul Aplin, chair of the technical committee at the Institute of Chartered Accountants of England and Wales, which scrutinises tax policy. “I am a great fan of technology taking away drudgery.”
Andrew Hubbard, a partner at accountants Baker Tilly, welcomes the greater transparency that online tax accounts — which will be available to all taxpayers — promise by showing how tax liabilities are calculated and by sharing their information. Since 2013, HMRC has collected PAYE data from employers in “real-time” each time they pay their workers.
“Personal tax is now moving into a real-time system of reporting and paying,” says Mr Hubbard.
Opening their account
The main challenge for HMRC, according to Mr Roy-Chowdhury, is to ensure that pre-populated information is correct. “Where it is PAYE information this is not going to be difficult, but it’s where people are changing jobs, or have multiple employment, that errors can easily creep in.”
James Hender, head of private wealth at accountants Saffery Champness, says the tax authority’s propensity to commit errors is a concern given that it will be soon collating data from multiple sources in a more automated fashion. “The Revenue somehow already gets its wires crossed. I’ve had clients for example who have received queries about properties that don’t even belong to them.”
There is the added challenge of ensuring that information HMRC gathers is compatible with its software. To this end, it has committed to releasing improved “application programming interfaces” which allow third parties to develop software that use the same logic as its own, and can therefore be used for pre-populating tax returns.
In time, this could allow apps to capture taxable gains and report them automatically to HMRC.
A dedicated app could, for example, track the capital gains of an investment portfolio and pass on the relevant information, mitigating the need for the taxpayer to declare their gains themselves. Others could track the distance driven on work-related journeys or rental income from a property portfolio.
Transferring information in this manner promises time savings for taxpayers — and improved compliance for HMRC — with the rise of buy-to-let landlords and the so-called “sharing economy”, where people earn money from renting their assets such as spare rooms through the likes of Airbnb.
Mr Hubbard says excitement about the potential for apps to make tax easier is justified, but the prospect of fully automated data collection remains distant. “It’s such a change from what we’re currently doing that it’s going to be a challenge.”
If and when the technical challenges are overcome, Mr Aplin says it is unlikely that many taxpayers, particularly those with complex affairs, will fully trust automatic systems to manage their relationship with HMRC in lieu of their accountant.
“However easy they make it to interact, there’s still the underlying complexity of the tax system and, importantly, it’s the responsibility of individuals to get it right,” says Robin Williamson, technical director at the Low Incomes Tax Reform Group, which represents taxpayers who cannot afford professional advisers.
“There is a danger that many will assume that because [pre-populated returns] are from the government, they must be right, like anything that comes out of a brown envelope today,” says Mr Williamson.
Mr Aplin says it is unclear what degree of checking taxpayers will be expected to undertake when the era of digital tax accounts is ushered in. “HMRC may need to change its thinking on what constitutes ‘acceptable’ errors.”
Public reluctance to make the digital transition could also stem from security concerns, says Gary Richards, a tax partner at law firm Berwin Leighton Paisner.
In 2007, HMRC was guilty of the largest government data leak to date, when it lost details of 25m child benefit recipients — including names, addresses, dates of birth, bank account details and national insurance numbers. Although the loss of physical discs remains a risk, cyber security threats have since moved on.
The most common threat is decidedly low-tech. So-called “phishing” emails by criminals posing as HMRC look to extract personal details and money from their recipients. The tax authority, which has issued warnings on these attacks, says it never asks for information in this way.
“The danger is that once you get more people interacting regularly with HMRC online, there are greater opportunities for targeting by criminals,” says Mr Richards.
There is also the constant risk of government networks being hacked, but HMRC stresses that the security of taxpayer information is its “top priority”. Where information is stored remotely — or on “the cloud” — it will be held in UK data centres, HMRC confirmed, adding that the opening of a dedicated cyber security command centre earlier in 2015 has boosted defences.
John Cullinane, tax policy director at the Chartered Institute of Taxation, says that despite the risks, there is “no particular reason for taxpayers to be overly concerned” about the integrity of the authority’s cyber defences.
“There are always worries but people should remember that HMRC already holds this information,” says Bivek Sharma, a partner at KPMG. “Digital accounts are just about bringing data together and making the interface more user-friendly.”
Restless digital non-natives
The tax authority’s claim that most people want to conduct their tax affairs online is supported by recent figures that show 63 per cent of individuals went online first to make contact with HMRC in 2014-15 — up from 53 per cent in 2011-12.
The same survey, however, highlighted the limits of resolving tax affairs online — only 5 per cent of taxpayers reported communicating with the Revenue using only the internet. The vast majority (82 per cent) picked up the phone.
Mr Williamson is among those who worry that in its efforts to accelerate the migration of tax online, and make cost savings, the tax authority could scale back support for those are not digitally savvy.
As HMRC has embarked on its “digital first” initiative the proportion of individual taxpayers reporting that it was easy to get in touch with HMRC fell steeply, from 75 per cent in 2008-09 to 59 per cent in 2014-15. The Revenue struggled last year to meet demand for its phone lines and only 73 per cent of calls were answered, short of the official target of 80 per cent.
Mr Cullinane says there is an inherent tension between the quest for efficiencies and an increasing focus on relationships with wealthy taxpayers, and the desire not to diminish the service offered to other taxpayers, including minority groups.
Sally West, strategic adviser at charity Age UK, says there should always be alternatives to accommodate those who are not online, particularly the elderly. “People shouldn’t be pushed into it if they are not comfortable.”
She points to the launch this April of a new tax break for married couples, worth up to £212 a year, which was widely criticised for initially being only open to online registrations. “The more barriers you put up, the greater risk that someone will miss out on something that is theirs by right.”
It is not only older people who have poor access to online services. Research published by HMRC in September found that 10 per cent of taxpayers (3m) are digitally excluded — having no use of the internet — with a further 29 per cent (8.6m) in the“assisted digital” bracket, where they need assistance to interact with the government online. Three in five self-employed taxpayers were digitally disenfranchised to some extent, HMRC found.
Bringing the money in
“I think if personal tax accounts are going to work, people have to want to do this,” says Mr Aplin, adding that HMRC would be advised to “pull” rather “push” taxpayers to move online. “If you push, you exacerbate concerns.”
Mr Aplin points to the success of voluntary online self-assessment returns, 85 per cent of which are now filed online. The incentive for taxpayers has been more time to file.
“If the digital offering is done right, people will naturally gravitate towards it in time, and then cost savings will be delivered,” says Mr Richardson.
By introducing “real-time risking”, with odd-looking data flagged to HMRC inspectors for investigation, Mr Hubbard says digital tax accounts could reduce the amount of tax that goes uncollected each year as a result of errors and non-payment. Tackling deliberate tax evasion is more challenging, however.
“Even if the Revenue can join the dots of different taxes, when it comes to the good old fashioned black economy, I’m not sure how much this will do,” says Mr Cullinane. The success of the digital transformation will ultimately be restricted by the complexity of the UK tax regime, he adds.
“We probably have the most complex tax system in the world . . . The average citizen, even with all of the facts on their screens, will still be struggling to work out what they owe.”
The Australian experience
Proponents of online tax accounts point to Australia, where the tax office launched its “myTax” service in 2014.
Two million taxpayers Down Under are expected to file their tax returns online this year using the portal, which is connected to citizens’ existing “myGov” account, which provides online access to government services.
The service is currently open to taxpayers with income or deductions from superannuation pensions, lump sum payments, managed investment funds and overseas pensions.
Graham Whyte, assistant commissioner of the Australian Tax Office, says myTax has been “a massive step ahead” in making self-assessment easier.
Hubs and spokes — detecting evasion
Inside the tax authority’s grand Baroque Revival offices in Westminster, a paragon of architectural traditionalism, is a small battalion of analysts working at the sharp end of a very 21st century drive against tax evasion.
Around 200 data analysts are plugged in to HM Revenue & Customs’ technological pride and joy — its “Connect” system, developed by defence company BAE Systems at a cost of £80m.
Contrary to the reputation of government IT projects, infamous for delays and overspends, Connect has proved a success for HMRC and a boon for the exchequer.
Since its launch in 2010, HMRC estimates the system has generated over £3bn in extra tax receipts through identifying underpayments by individuals and companies.
The technology matches more than 10bn items of data from taxpayer records, allowing HMRC analysts to detect inconsistencies and suspicious activity in minutes, where previously it could have taken months.
Connect cross-checks information collected by HMRC, from the likes of self-assessment and VAT (value added tax) returns, with other official data such as that held by the Land Registry, the DVLA and Companies House. Third party data has also been acquired by the Revenue and fed in, although the authority is reticent on the details.
The system visualises an individual’s tax affairs in a hub-and-spoke fashion. Each document relating to a taxpayer (the hub), is connected to them (via a spoke), and can be opened up for manual interrogation. Relationships with other individuals or entities are also illustrated, allowing analysts easily to pursue lines of inquiry.
In a demonstration to the Financial Times, an HMRC analyst identified the phenomenon of so-called “leaves” — entities, such as bank accounts and companies, that Connect visualises as dead-ends, having connections to only one other piece of information. This immediately raises suspicions of tax evasion, he said.
“Leaves” that share duplicated information commonly identify examples of fraud, and can lead back to perpetrators through details such as mobile phone numbers.