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HMRC avoids reform, shifting risks to business

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Following on from the digitisation of VAT and PAYE, Bill Mew asks if the complexity of HMRC’s Making Tax Digital strategy has been allowed to get out of hand.

21st Apr 2021
CEO and founder Crisis Team
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For years the Government Digital Service (GDS) has been encouraging large government departments to migrate away from inflexible legacy systems that are difficult and expensive to maintain. It has also wanted them to avoid long and inflexible contracts with an oligopoly of large IT services firms. However, the nirvana of flexible, cloud-based systems and smaller, more innovative suppliers always appears to be just out of reach.

HMRC’s five-year Securing Our Technical Future (SOFT) programme was meant to move services and data away from three Fujitsu-run datacentres and into the cloud. Yet the Fujitsu contracts were recently extended by three years, as were many other large contracts across the rest of government, with uncertainty over Brexit often cited as an excuse. 

However, now that the Prime Minister has succeeded in getting Brexit done, the continued inertia begs the question: is there a coherent modernisation strategy at all?

Ideally, taxes need to be simple, fair, transparent, easy to report and collect, and hard to avoid. If as much of this can be automated then we all stand to gain. We need to start by simplifying the tax system at a policy level. Then we need HMRC to ditch its legacy systems and move to a cloud-based system that has the flexibility to adapt to ongoing changes in policy and provides simple Application Program Interfaces (APIs) to allow for easy integration.

“Making Tax Digital - starting with VAT

SOFT began relatively well with a move to transform the way that VAT was reported. While introducing efficiencies and reducing costs for HMRC, much of the reporting burden was passed to companies. Software providers successfully integrated VAT reporting functionality into their applications by using a simple API to integrate with HMRC.

HMRC moved onto real-time information (RTI), with employers and pension providers needing to tell HMRC about PAYE payments at the time they are made as part of their payroll processes. Again, this was a relatively simple API integration, but more of the reporting burden was passed to companies.

The focus has since expanded to the Making Tax Digital programme for personal and company tax reporting. This next step will entail hundreds of APIs and a significant level of complexity.

Passing the buck

Unfortunately, the further that HMRC goes without transforming its own systems and simplifying the processes and infrastructure, the more complex the process will be. Continuing to transfer more of the burden to others, without the necessary transformation and simplification, could make the whole process too onerous and the overall project risk too great.

What was supposed to be a digital transformation program appears to be a push for digital without the necessary transformation within HMRC to address legacy and complexity issues.

Identity problem

This is symptomatic of a wider problem across government. Few government departments have succeeded in truly migrating away from their legacy systems and there is a complete lack of interoperability. This is because there is no government-wide data architecture, unique identifier or standard for identification.

The NHS uses your NHS number. DVLA uses your driving licence number. The Home Office uses your passport number. At the same time, DWP is working on a Dynamic Trust Hub to check your identity, while many other departments use GOV.UK Verify.

Meanwhile, HMRC continues to use National Insurance numbers and UTRs (Unique Tax Reference codes) with Government Gateway as a log-in mechanism. This is if you are an individual, as there is another system entirely if you are an organisation. Thus your accountant has to use one mechanism to submit your personal tax return and another to submit your company one.

The talk of introducing vaccine passports could overlay yet another government system with its own unique identifier and log-in mechanism.

The government is currently running a “discreet pilot” of a successor to Verify. If adopted by HMRC and others, this could provide an effective national digital identity system. In theory, government departments could then allow limited query access in much the same way that hire car firms are already able to query the DVLA database to check that you have a valid driving licence.

In its commentary on HMRC's 2019-20 annual accounts, the National Audit Office (NAO) found that cost-cutting measures at HMRC had resulted in IT systems that “constitute a significant risk to the department.” The HMRC IT systems are deemed to be vital to its ability to perform functions. The risk to these systems will become particularly acute as it continues its move towards a fully digital tax system. Those with knowledge of difficulties with other major government projects, like the universal credit benefits system, remain concerned.

The software firms that were able to adapt their applications to integrate with the HMRC APIs for VAT and PAYE and going to find integrating over a hundred HMRC APIs far more challenging. The few firms that actually succeed in doing this will not only be seeking to recoup significant costs, but may find themselves in an oligopoly where they can charge us far more than it cost.

Who’s in charge?

Governments are well known for being short-termist, never looking further than the next election. This is exacerbated by the fact that seniority and longevity in government IT leadership roles are limited. Overcoming the departmental fiefdoms takes both experience and seniority. Not only have many of the most experienced hands left the public sector, but those in senior IT roles struggle to effect change as such roles last only two years - far shorter than in the private sector.

Appreciating the cumulative impact of HMRC’s complexity takes deep understanding. Plotting a path to overcome it, while minimising the overall cost and risk for all, will take real vision. And making it all happen would require long-term strategic leadership.

Post-Brexit, there is both a need and an opportunity for real digital transformation in government. It is all too easy blame Brexit for much of the recent transformational inertia and to apply short term fixes such as vaccination passports to address some immediate challenges. Putting off the need for digital transformation and passing the burden onto companies is not the answer.

We need bold leadership, cross-party political backing and longer-term strategic planning to drive real digital transformation in government if we are to regain the position that we once held at the top of the UN ranking for e-government. HMRC needs to be an example of how to do this right, not of how to amplify cost and risk and pass it all on to others.

Replies (12)

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Stepurhan
By stepurhan
22nd Apr 2021 09:01

Quote:
HMRC’s five-year Securing Our Technical Future (SOFT)
The fact that they cannot even put together an acronym with the letters in the right order says everything about how well planned this all is.
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Replying to stepurhan:
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By emanresu
22nd Apr 2021 17:49

But which, if either, is correct?

SOTF

Sitting On Their F..........s

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By DEan Merchant
22nd Apr 2021 09:55

Despite submitting VAT returns for clients under MTD, HMRC still raise enquiries, then ask to see a breakdown of the transactions making up boxes 1-9. I thought MTD was to give transparency to the VAT returns. If, I suspect, only the totals for each box is transmitted to HMRC on submission of the VAT return, There appears to be no more integration than receiving the 9 boxes totals through the government gateway. All MTD creates is a bigger workload for the accountants or book keeper without any increase in technological integration and an additional cost of purchasing software that still only delivers 9 amounts in 9 boxes. Is this the way forward?

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Replying to DEan Merchant:
By Charlie Carne
22nd Apr 2021 15:15

(1) How does MTD for VAT create a bigger workload? I recognise that it forces everyone into a digital solution that they may not like or want, but it doesn't increase workload; just transforms it from manual to digital.

(2) digital integration in the software between the individual transactions and the figures posted into the 9 boxes of the VAT return allows for accurate reconciliation between both, irrespective of whether or not the individual transactions are submitted to HMRC with the return. If HMRC open an enquiry, there is a digital report already in existence that can be provided to HMRC for analysis, rather than a bundle of papers with a manually created set of totals hand-written on the bundle that needs manual checking.

(3) I have little doubt that, in the long term, a data file containing all of the individual transactions will be submitted to HMRC as part of the filing requirements, but that would be a big 'ask' as a first step in MTD. Therefore, a much simpler initial step is to mandate digital bookkeeping, with the requirement to submit the full data-set being delayed for some years until we've all got used to the first step.

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By Rgab1947
22nd Apr 2021 10:07

They cant put up taxes as the manifesto said no to that. But they need more revenue.

Well transfer responsibility to taxpayers so we can have an ever increasing penalty revenue stream. And as the smaller tax payer normally does not have a clue its guaranteed annuity income.

Yes I am a cynic.

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By Gerry Brown
22nd Apr 2021 10:15

I worked in what was then the Inland Revenue in the late 1970s and early 1980s. I later worked for various accountancy practices and financial services companies. My experience is that, in general, the IR of my period was the most efficient of all the organisation for which I've worked. What has happened since? HMRC has been given a lot more taxes to administer and jobs to do (e.g. minimum wage) with less staff and the staff. The UK tax code has 'exploded' in volume over the last 40 years. There have been improvements - self assessment has been a success, RTI also falls into that category and I would argue that the introduction of SDLT (and the Scottish and Welsh variations) was a success.
But I agree with Bill Mew - there is little joined up thinking. The tax code has to be simplified. There are too many pointless reliefs - why do we have ISAs when we have a personal savings allowance and a dividend allowance? Why do we have EIS and VCTs? Why do we have so many varieties of employee share schemes?
A change in approach - from government - to our tax system is long overdue.

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By Gerry Brown
22nd Apr 2021 10:15

I worked in what was then the Inland Revenue in the late 1970s and early 1980s. I later worked for various accountancy practices and financial services companies. My experience is that, in general, the IR of my period was the most efficient of all the organisation for which I've worked. What has happened since? HMRC has been given a lot more taxes to administer and jobs to do (e.g. minimum wage) with less staff and the staff. The UK tax code has 'exploded' in volume over the last 40 years. There have been improvements - self assessment has been a success, RTI also falls into that category and I would argue that the introduction of SDLT (and the Scottish and Welsh variations) was a success.
But I agree with Bill Mew - there is little joined up thinking. The tax code has to be simplified. There are too many pointless reliefs - why do we have ISAs when we have a personal savings allowance and a dividend allowance? Why do we have EIS and VCTs? Why do we have so many varieties of employee share schemes?
A change in approach - from government - to our tax system is long overdue.

Thanks (1)
By 0098087
22nd Apr 2021 10:17

Can I sell my house, move up north and work at Tesco all before MTD for Self assesment starts? Could be an idea??

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By North East Accountant
22nd Apr 2021 10:54

Imagine MTD is like moving house.

Before you move you clear out all the rubbish that you've accumulated and is no longer fit for purpose, and to do it properly (the whole Marie Kondo), even the 30 years of stuff in the loft goes to the tip as well (I've got to say getting rid of my 1984 do they know it's Christmas LP was traumatic).

Now HMRC want to move "house" from the old legacy way to an all singing and dancing new "house".

The trouble is HMRC are not having a clear out.

Before the move the tax system needs root and branch gutting to clear out all the rubbish that has accumulated over the last 50 years.

I know it's a political issue but someone needs to stand up to the Government and tell them the facts of life.

If you keep piling rubbish in the attic one day the ceiling will come in..... and you'll only have yourself to blame, HMRC.

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By Charlie Carne
22nd Apr 2021 10:54

The greatest advance that the new digital systems can bring is in simplifying the way that data is held by HMRC. Once HMRC migrate everything into their new databases, accessible to the Agents Services Account (ASA), they need to ensure that agents can see everything that clients can see within their own Business Tax Account (BTA) and that authorised agents are able to make all of the same submissions through the ASA that a client can through the BTA. HMRC must stop this insistence that agents can't make changes (eg to client addresses) from the ASA (or Government Gateway). If HMRC want agents to help HMRC collect the right tax, then HMRC need to allow us to deal with everything ourselves (once we have been duly authorised by the client) and stop keeping part of the data secret from, and unchangeable by, us.

Since HMRC have sensibly decreed that most of the access to the ASA should be via third-party software using API's, they need to open up more API's and allow our tax software to display all of the information held by HMRC and where we need, for example, to change an address or request reallocation of overpaid tax from one year to another year, we should be able to do all this via our own software. Further, any changes made should be reflected in real time (subject only to those that require review and approval by HMRC). For example, why does it take HMRC up to 5 days to add a new client to our Government Gateway after we have input the authorisation code posted to the client? No further review or approval is required; it's a an automatic process. So it should be instant. Computer databases long ago moved on from batch processing that was common in the 1970s.

Identity Problem
A simplification of tax references could be made by using the Companies House registered number for companies and LLP's and NI numbers for individuals, with a suffix to determine the tax (C for CT, V for VAT, P for PAYE and I or S for SA income tax). HMRC could also remove the pointless addition of a second PAYE reference for payments (a single reference is sufficient for both declaring and paying PAYE, as it is for all other taxes). HMRC could also use a single bank account for all taxes, with the UTR (and its new suffix) determining which tax it was for. The distinction between Shipley and Cumbernauld bank accounts (which has never, in my experience, mattered in practice) should also cease. All tax payments then become easy, as they will all go to the same bank account, so we don't need to keep reminding clients where to pay the tax; just the amounts and dates.

With UTR's based on company registration or NI numbers, they would no longer be confidential, but they often aren't anyway, with (for example) many sole traders encouraged to reveal their UTR on their sales invoices in the mistaken belief that this somehow 'proves' their self-employed status. The idea that the UTR is secret, and that knowledge of it is in itself some sort of proof of identity is a nonsense. So, if HMRC use other methods of proving identity over the phone, the UTR need no longer be generated as yet another numbering system from HMRC but can, instead, be self-identifying from Companies House or NI numbers (simple partnerships would require a new number, but the individual partners would use their NI number). One simple method of proving identity over the phone would be for HMRC to use a version of authenticator apps that are now increasingly common for two-factor authentication (2FA) login to web portals. We could either log into the ASA or BTA and provide HMRC with an ever-changing code that appears on screen, which can be used to verify us as having authority to access the account as the taxpayer or agent, or HMRC could use one of the generic apps like Microsoft or Google Authenticator.

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Replying to charliecarne:
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By Hugo Fair
22nd Apr 2021 17:52

Well it had to happen eventually ... me agreeing with the entirety of a post from Charlie Carne!

The key section in the main article is the para where it says:
"Unfortunately, the further that HMRC goes without transforming its own systems and simplifying the processes and infrastructure, the more complex the process will be ... What was supposed to be a digital transformation program appears to be a push for digital without the necessary transformation within HMRC to address legacy and complexity issues."

A simple analogy is when the 'solution' to rising sea levels is thought to be to just keep adding floors to existing structures ... everybody with a working brain cell knows this approach is doomed, but the new bits look nice & shiny (and with a bit of luck will outlast the post of the person responsible for agreeing the 'solution').

And, as Charlie hints at, the problem is less the technology per se and more the teflon culture endemic throughout senior HMRC management. Of course APIs COULD allow data held by HMRC to be viewed ... but HMRC aren't even prepared to let software developers retrieve data that the client/user has submitted (so as to check whether data corruption has occurred), let alone see the values held after various HMRC processes have 'transformed' the data submitted. And they don't even cite security concerns when rejecting this approach - but openly admit that it would be embarrassing to do so (given unreliability of their systems).

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By jamiea4f
23rd Apr 2021 11:42

I do vaguely understand that HMRC becoming more tech friendly has been successful in some areas, however in others it’s been a disaster. Seems to me like they’ve shut offices etc to save money, which they’ve then wasted in half cocked technology and some of their efficiency projects have been disasters. As for the withdrawing of software, I dread to think how much some companies have wasted in having to now pay for their own to do what HMRC’s software used to do for free. I would expect the PAYE to be the next to go, ironically one of the best things they’ve put together...

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