Prompts and nudges: Who’s to blame when they fail?by
As we increasingly rely on technology in the quest for better compliance, the question of who is responsible when something goes wrong still remains.
During the Tax Talk Live session I took part in at the recent AccountingWEB Live Expo, someone asked a question about late VAT registration. In this specific case, the problem had only been spotted when preparing the annual accounts many months after the threshold had been breached. Who was liable for the penalty: client or agent?
A little later, Rebecca Cave asked a question about prompts and nudges in software and where responsibility would fall if a featured prompt or nudge failed to work and, as a result, a taxpayer missed a deadline or obligation. Expanding the question, Cave asked who would be liable if a software-generated calculation was wrong or if software put a figure in the wrong box.
These questions lead us into interesting territory.
Taking the first question first, the issue of who is at fault for failing to spot that turnover has exceeded the VAT registration threshold generally comes down to a choice between client, bookkeeper or agent. The answer is likely to depend on who kept the records, when the bookkeeper or agent saw them, and – perhaps – whether the client had been alerted (or believes they should have been alerted) to the potential issue.
Nudge me (digitally)
One of the initial ambitions for Making Tax Digital (MTD) was that MTD-compliant software would contain prompts and nudges to alert taxpayers to relevant reliefs and to identify potential errors at the point of data entry in order to reduce errors and improve compliance.
The VAT registration threshold strikes me as a perfect candidate for a software prompt. It is such a basic bear trap that an automatic rolling calculation – and an alert when it is reached – might be expected to be a very common feature in bookkeeping software, but – to my surprise – it doesn’t seem to be. On an (admittedly quick) search, I could only find one product that does it automatically.
As the market continues to develop, we are likely to see increasing numbers of prompts and nudges built into software and apps to alert users to deadlines, potential tax reliefs and potential errors. Inevitably they will sometimes fail to work as expected.
While software glitches have been a feature of accountancy practice for many years, the extent to which bookkeeping software is now being used (whether because of MTD or because it is the natural direction of travel) and the increasing use of proactive prompts and nudges, the question of who is responsible for a failure will become broader, extending more often than in the past to include the software developer.
Further complications with MTD
The next stage of MTD will further complicate the picture.
MTD for income tax self assessment (ITSA) imposes a requirement for quarterly returns if qualifying income (broadly, income from self-employment and/or property letting income) exceeds £10,000 a year. So instead of seeing the records annually, the bookkeeper or accountant is likely to see them at least quarterly. That will increase the number of opportunities to spot the fact that turnover is approaching the VAT registration threshold – and for difficult conversations if it is missed.
MTD ITSA quarterly reporting will also mean that HMRC will have access to more regular information. Much has been made of how quarterly return information would help HMRC target support in a more tailored way in a situation such as the Covid-19 pandemic. I have no idea how far HMRC’s thinking on this has progressed, but contacting a taxpayer whose last four cumulative quarters exceeded the VAT registration threshold to suggest they check the monthly cumulative position would be a very tangible way to demonstrate that quarterly return information was actually being used proactively to help taxpayers meet their obligations.
Timely VAT registration is just one issue.
One of the greatest opportunities HMRC has to demonstrate that tax technology can be helpful is provided by the new late filing and late payment penalty systems. Both are arguably fairer than the regimes they will replace, but both are vastly more complex.
The new late filing regime extends to 16 pages of legislation and MTD significantly increases the number of potential late filing penalty triggers. Prompts and warnings built into software could help taxpayers navigate this system and help to reduce the practical impact of its complexity. It is an opportunity that needs to be seized.
Transparent or opaque
MTD is far from the only way in which technology is impacting on tax.
In future, artificial intelligence (AI) could transform the way advisory work is carried out. AI in the form of IBM Watson has already been used in this context in the USA by H&R Block to power advisory work. It is also being used to analyse complex legal documents (such as sale and purchase agreements) for tax-sensitive clauses and to predict the likely outcome of tax cases.
How far will agents need to understand the way the AI operates? How far will we want to trust a “black box” approach where we simply act on the answer the AI gives?
I suspect that most will want a degree of transparency – a glass box rather than a black box – to have a reasonable understanding of what the AI is doing.
I remember one of my former partners doubting the accuracy of calculations when my old firm adopted tax return software. For the first week or two he checked every computation and then conceded that the software was actually getting them right. Given the complexity of personal tax calculations now, how many practitioners check software-generated computations?
But, when we rely on something without checking it, the question of liability if it is incorrect again arises. To what extent should we check?
At the end of the day, the decision comes down to something that software and AI will never replicate: professional judgment.
The degree to which we rely on technology continues to increase. It brings the potential for better compliance and fewer encounters with penalties. It has already transformed the way we work and will continue to. The pace will, if anything, accelerate.
But as that transformation continues, one question will continue to come up at AccountingWEB panel sessions: who is responsible when something goes wrong?
And the answer isn’t getting any easier.
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Paul Aplin was for many years a tax partner with an independent West Country firm. He is a past president of ICAEW, a former Chair of the ICAEW Tax Faculty, a member of CIOT Council and the Tax Technology Committee of CFE. He is a non-executive director of three companies, a member of HMRC’s Admin Burdens Advisory Board and the OTS Board....