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TW Ed thinks it is high time HMRC used its vast information powers to help taxpayers to complete their tax returns, as set out in its latest Digital Strategy paper.

Introduction – Digital Revolution

Last week, HMRC published its Digital Strategy for 2014 and beyond. Beneath the froth and pratulent images, some good work seems to be in hand. Ordinarily, I’d (literally) fight shy of any publication which suggested that I “Think of it as a journey...” (8.2) but for once, I recommend people grit their teeth and read (this article and) HMRC’s paper. While this article focuses on HMRC using information it already holds to make it easier to fill in tax returns, there are some other issues which are picked up towards the end.

Tectonic Shift

Those who have been working in tax for long enough will recall the introduction of Self Assessment as being something of a revolution in the way that taxpayers were obliged to report and account for their tax affairs. In the good old days, the taxpayer told HMRC about his or her income, and HMRC worked out what tax was due... and then the taxpayer’s agent would tell HMRC why the sums were wrong – or incomplete. In the early / mid-nineties, the legislative ground shifted: the taxpayer had to do all the work, and the taxing authority was able to spend more time checking that work than crunching numbers.

Since then, HMRC has spent considerable time and effort honing its information powers and using them: for instance, HMRC requires banks and similar institutions to provide details of interest paid to their respective account-holders. In recent years, HMRC has become quite proficient at processing such copious amounts of data to tie in to individual taxpayers’ records and highlight apparent discrepancies. Of course, HMRC has access to many more third party information sources than just banks and building societies.  

HMRC’s digital capabilities appear to have increased dramatically in the last few years – not just in terms of raw power but also in terms of administration and organisation. Previous articles have referred to HMRC’s “Connect” tool, which aggregates and refines data from a vast array of sources, to provide a detailed picture about an individual. It has been said before that it will not be long before HMRC knows more about you, than you.

Use Those Powers for the Greater Good?

Again, those who are long in the tax tooth will recall that enquiries which opened around omitted sources often started with a dialogue along the lines of,

“I have some information about you/ client. I am not going to tell you what it is, in the hope that, by aiming and missing, you/your client will disclose yet more omitted income. Let verbal Battleships commence.”

Such fun and games are largely now a thing of the past, thanks to a greater emphasis on ‘sharing the perceived risk’ with the taxpayer. And, the more complete is HMRC’s information from other sources, the less chance of an evasive taxpayer letting slip something that HMRC didn’t already know. And they really were fun and games: I can recall several occasions over the years where the taxpayer genuinely had no idea what HMRC was talking about, with a lot of delay and unnecessary stress for no good result.

On the basis that the vast majority of taxpayers are happy to make full disclosure and pay the right amount of tax, it has preyed on my mind that HMRC has for some time now had the capability to be far more proactive in helping taxpayers. Why does HMRC not tell taxpayers about all the information it holds? Even – shock, horror – pre-populate people’s tax returns with the information to help make sure that nothing is omitted by accident?

Perhaps it is a case of old habits dying hard or perhaps HMRC has been playing quite selfishly with its new digital toys. To be fair to HMRC, if my over-stretched memory serves, the idea of pre-populated returns was mooted several years ago, with HMRC observing that several Nordic countries were doing it wholesale. Certainly, the OECD was roundly supportive, in its 2006 publication Using Third Party Information Reports to Assist Taxpayers [to] Meet Their Return Filing Obligations - Country Experiences with the Use of Pre-Populated Personal Tax Returns.

A more recent report (2012) Improving Tax Governance in EU Member States: Criteria for Successful Policies  by the European Commission also stated that:

"[Pre-populating tax return information] appears a successful formula to improve the efficiency of tax collection for the [sic] personal income tax. Pre-populated tax returns were first introduced by Denmark in 1988. Since then, “pre-filling” has evolved to become a significant (and for some, transformational) component of e-services and the egovernment strategy by revenue bodies in many countries."

Third Party Information

While the obvious candidates are P60 and P11D information, why stop there? HMRC knows about bank interest, chargeable events, property disposals... Why not put all that information, which HMRC uses primarily to prevent evasion, to the far greater good of the average taxpayer? What about dividend income?

Advantages

From the taxpayer’s perspective, it must surely be a great help for the correct information already to be entered in the correct boxes – even if it were only the employment pages, it must help achieve greater accuracy, more convenience and less time spent.

From the tax authorities’ perspective, it should ensure fewer mistakes and therefore greater compliance in some areas, presumably allowing more resources to be allocated to other areas.

Other Considerations

Of course the problem with making things too easy is that, if too little time is spent considering one’s tax affairs, there is always the chance that something reportable may be omitted. An obvious example would be a redundancy payment (or part of) that the employer did not report because it was considered non-taxable. The former employee might with some justification also fail to report on the basis that “HMRC knows everything, so I assume by its omission that it also feels it to be non-taxable/non-reportable”. If HMRC is not careful, it could end up taking on more responsibility by trying to be helpful, perish the thought.

Some countries also ‘lock’ certain parts of the return so that the pre-populated information cannot be over-written. Of course it should be hoped that it would be rare to feel the need to dispute but the more comprehensive the information, the more likely a difference of opinion will arise.

Timing will also be a factor: the more comprehensive are HMRC’s efforts to pre-populate a tax return, the longer it will take to capture all information from all sources, to add to the return. Under the current timetable, 3 months are lost between the end of the tax year and the deadline by which Forms P11D are required. Perhaps there is more to harmonising the benefits regime with PAYE/RTI than I’d previously thought.

Do We Want Pre-Populated Tax Returns?

I have to say that I am in support of pre-population. For what it’s worth, my opinion is that information is like money: it’s useless unless it’s being used. (That is certainly how I explain things to my better half although she, sensibly, remains to be convinced). I think HMRC has a civic duty to make best use of the information it has amassed, for the benefit of the taxpayers it serves, as well as the very few it pursues. Of course confidentiality is an important issue, as is access – not everyone wants to join the Information Revolution.

It could also make agents’ lives easier, requiring far less time to complete standard information. Presumably HMRC is thinking this through with tax return software providers, since it would be unfortunate if agents were unable to achieve the same efficiencies.

I also think it is about time we were to apply the maxim, “If you have nothing to hide, then you have nothing to fear”, to HMRC in a fashion not unlike it so often applies to taxpayers. Glossing over (for now) the huge tracts of Revenue Manuals redacted from public view, it seems to me to be right that HMRC does its level best to achieve transparency in terms of all of its information sources. Some sharp questions might follow. It again distils to the question(s) of who serves whom, and to what end?

Other Aspects of HMRC’s Digital Strategy

Pre-population of returns is only part of a larger whole. It is clear that I am not alone in thinking that intelligent use (and re-use) of information can go a long way.

In its Digital Strategy Report, HMRC states that it is responsible for more than two thirds of all government transactions. While one might expect it to be a substantial proportion, that is an astonishing statistic.

While I struggle to hear the voice of HMRC’s Automated Telephony Service over my grinding teeth, it seems we are to get more of the same so-called “Intelligent telephony”.

I tweeted a couple of months ago, that HMRC was using its voice-automated service on its Bereavement Helpline. I suggested that this gave new meaning to the phrase “cold call”. I also recounted part of the exchange, as follows:

“Are you calling to tell us that someone has died?”

“Yes” (Did I not dial the Bereavement Helpline?)

“Are you calling about your own tax?”

“Er, no.”

I assume that HMRC has deliberately used the same statisticians who extol the virtues of direct (junk) mail marketing: everybody loathes it but somehow it survives, the cockroach of the communications world.

It seems HMRC wants to start using text messages – SMS – and even webchat to deal with customers – sorry, taxpayers. Anything, it seems, to reduce live human interaction. Humans are, of course, inconsistent, so should be removed from automated systems. Just so long as the replacing automation is consistently good and correct...

Only once does the report say that going digital should cut HMRC’s costs. It is incredible that cost is not a key factor, if not the key factor, in HMRC’s digital transformation strategy.

“...we’ll have to be careful that we don’t leave any of those ‘digitally excluded’ customers behind...”(8.1), and “...If [taxpayers] do need to contact us through a [non-online] channel, they will receive a fuller service...”(5.1) ...is precisely not what I am hearing about the personalised service supposedly replacing all of the walk-in tax offices. Or not replacing, might be more accurate. Over 70 and dealing with the loss of your spouse? We have an app for that. But we won’t come to see you, to help you to help us.

Moving on, the paper mentions at several points that HMRC intends to be more agile, to be able to deal with issues in real time or thereabouts. To an extent, that is commendable. But there is this tricky thing, called legislation – and, supposedly, consultation before you make more of it. (Didn’t somebody once promise that there would be less legislation?) There’s been far too much car-crash legislation in the past few years: I dread to think what might happen if you leave HMRC’s systems en bloc to the whim of people who are programmers first and tax professionals second, if at all.

Finally, “We will increase the flexibility of funding arrangements for services”. I am not sure what that means and, particularly since we found that HMRC has been passing confidential taxpayer information to commercial enterprises under similar-sounding prestidigitation, I am now far less inclined to give the benefit of the doubt.

Perhaps the next time I rebuff someone calling to ask if I have thought recently about changing my electricity supplier, they will kindly remind me that I have yet to submit my 2013/14 tax return. And if, as their notes suggest, I really did receive so little interest on my HBoS 30-day savings account, maybe they will then offer to put me through to a building society offering a much better rate..?