My last article for TAXline about the digitalisation of the tax system was published in November 2019. Sadly, many of the observations made in that article remain valid, notably that:

• some HMRC consultations appear to give little consideration as to how particular measures should be implemented digitally;
• HMRC IT specifications are introduced too late in the process and are lacking in detail;
• HMRC should provide a testing environment that mirrors the live Making Tax Digital (MTD) environment before extending MTD any further; and
• current law needs to be reviewed to facilitate the increased administration of the tax system by computer.

In his 2006 Review of HMRC Online Services, Lord Carter of Coles recommended that “as part of their work to deliver robust, high-capacity services, HMRC should build in more rigorous testing. Each of the services should be capacity tested at least a year before our recommendations are implemented, and if any tests are not successful the measures relating to that service should be deferred.” These recommendations remain as valid now, if not more so, as when they were made.

At the time of writing, there are a number of discussion documents and calls for evidence open. These include:

• Simplifying and modernising HMRC’s Income Tax services through the Tax Administration Framework (closed 7 June 2023);
• The Tax Administration Framework Review: Creating innovative change through new legislative pilots (closing 20 July 2023); and
• The Tax Administration Framework Review: information and data (closing 20 July 2023).

What progress is made on any of the outstanding issues will depend on both the response to the documents and the policies subsequently developed by HMRC, HM Treasury and the government.

Simplifying and modernising HMRC’s income tax services through the Tax Administration Framework

Disappointingly, this discussion document doesn’t seem to consider tax agents at all. Perhaps this is not so surprising, given that, notwithstanding a recognition that agents are important in the running of the tax system, they are often overlooked in implementation. As an example of this, when first released, the new PAYE settlement agreement digital form only allowed one member of staff from each firm to access the form. Some agents are still accessing client’s personal tax accounts by using the client’s credentials because of the lack of corresponding agent access.

The document does seek to open up the debate and asks a lot of questions about improving the PAYE system, including whether PAYE codes could be replaced. However, in my view, the imperative is to fix the issues with real time information (RTI) that cause duplicate employments and difficulties with PAYE reconciliations.

The document also explains that the government is reviewing the legal obligation for taxpayers to notify their tax liability. The current requirement to notify chargeability is a hangover from when HMRC had to issue paper tax returns. Why is it still necessary? Surely it would be better to just file your self assessment (SA) return and pay your tax on time. The requirement to notify chargeability should be abolished.

The discussion document does note that the government is “to review the circumstances in which a taxpayer should submit a tax return”. It goes on to note that the government is “prioritising this element and [the] document explores the ITSA criteria in detail”. The requirements to be in MTD depend on being in SA. Clearer rules are required before MTD is mandated but currently HMRC’s MTD team seem reluctant to engage on this point. A more holistic approach would be helpful.

Creating innovative change through new legislative pilots

This discussion document refers to IT sandboxes and HMRC’s developer hub. But unfortunately, at a recent launch meeting, it became clear that the discussion document does not cover improving the test facilities for developers. This is an outstanding issue that needs fixing. To have a successful digital tax system we need a comprehensive testing facility to enable developers to fully trial their products. Currently this is not possible, and the discussion document has missed the opportunity to improve this.

Having legislative sandboxes will require careful implementation. Too frequently, how to administer and police new law by computer is not considered when the law is drafted. 

Information and data

Table 1 of the call for evidence on information and data lists the approaches of a number of countries to digitalisation. The list includes Estonia which, along with other countries, allocates specific taxpayer identification numbers.

In order to make digitalisation a success, HMRC needs to introduce such a reference or identifier that cannot be used to claim repayments and that is easy to obtain. I acknowledge that the introduction of such an identifier may be politically difficult given the UK’s historic objections to national identifiers. However, this should be viewed as an extension of the current system of unique taxpayer references and national insurance numbers, but without the issue of fraudsters trying to access repayments.

The identifier could be used to track correspondence and be given to third parties to facilitate:

• the reporting of income;
• the posting of the details to the taxpayer’s tax account; and
• to prepopulate tax returns.

   

Prepopulation is mentioned in the information and data document and was one of the original aims of MTD, although it now appears to have been sidelined in the urge to close the tax gap by enforcing quarterly reporting. Does quarterly reporting deserve such a priority, and is it even necessary? Should the focus instead be on taxpayers keeping digital records and the benefits that can bring, such as quicker and simpler invoicing? Keeping digital records would appear to meet HMRC’s aims of reducing the tax gap without the extra burden and cost of quarterly reporting.

The benefits of a better system

If HMRC’s systems were seen as accessible and user-friendly, would they be adopted readily, without the need for the threat of penalties? Should HMRC concentrate on stressing the benefits? The world has changed since MTD was conceived. Many taxpayers are now used to being digital. In 2022, 93% of the country’s population used online banking. 

Partly due to the pandemic, many more taxpayers are also now used to online retailing. This is adding to HMRC’s difficulties, because taxpayers compare HMRC’s customer service unfavourably with their digital shopping experience. Taxpayers are used to getting immediate acknowledgements and confirmation of orders with online tracking of their order’s progress. HMRC’s tracker in comparison is not really a tracker, but rather a summary of expected response times, which appear frequently not to be met.

Even when documents are emailed to HMRC, taxpayers do not necessarily receive an acknowledgement. One explanation given for this is that HMRC does not want to be seen to be accepting any of the contents of the document as correct. Surely a standard response could be drafted that makes it clear that acknowledgement of receipt of a document does not mean that HMRC has validated the contents?

ICAEW was one of 10 professional bodies that wrote to the Chancellor of the Exchequer on 1 March 2023. I found the response from Victoria Atkins MP, Financial Secretary to the Treasury (FST) depressing. It says: “The key to reducing waiting times for customers and improving customer satisfaction even further is offering an easy and simple online service – one where it is much easier to go digital than to telephone or write to HMRC.

“Between now and 2030, HMRC will build a digital tax system that does more to help customers get their tax and payments right first time, reduces error and fraud and fits seamlessly with the way people run their businesses and their lives.”

The only plan to improve HMRC’s customer service is to go digital. But unless those services are well designed, the risk is that things will only go wrong more quickly. How much better will the digital approach be?

On one application made online, we were told the response time would be more than three months. This is significantly quicker than the expected response time for postal applications, but still a long wait for people trying to sort out their tax affairs. What is more, the FST only promises the new system by 2030. HMRC’s customer service needs improving now.

HMRC is probably never going to get the funding to be able to match the big online retailers or banks. But experience shows that taxpayers are not reluctant to embrace digitalisation when it is done well. HMRC should concentrate on the carrot – showing the benefits for the taxpayer – saving the use of the stick for other parts of the tax code.

Moving to a working digital offering will take time. Meanwhile, the government needs to provide more funding now to improve HMRC’s customer service.

Steve Wade, Partner, People Advisory Services, EY, and chair of the Tax Faculty’s Employment Taxes and NIC committee