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Prompts and nudges: Who’s to blame when they fail? | accountingweb

Prompts and nudges: Who’s to blame when they fail?


As we increasingly rely on technology in the quest for better compliance, the question of who is responsible when something goes wrong still remains.

8th Dec 2022
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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.

Leading questions

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. 

New world

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.


Replies (20)

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By Tornado
08th Dec 2022 16:37

Many moons ago I suggested that HMRC should provide the MTD software for free that everyone would use for Accounting, Tax Submissions and other information that they would require to be submitted. One of the advantages of such a system is that everyone would be using exactly the same software and thus there would be only one system to learn. HMRC would be able to make updates to the software centrally and everyone would automatically be updated at the same time. With such free software and HMRC ensuring that this software was always up to date, we would have the ideal tax administration system that met with all of the Government's goals.

In practice, of course, (fortunately) this can never happen for myriad reasons, not least of all that hundreds of tax and accounting software developers would become redundant. But it would be absolutely clear who was responsible for the accuracy of the software (including winks and nudges) when it was being used.

I think what I am tying to say is that MTD will fail miserably mainly due to the complexity of the tax system (24,000 + pages of Tax Code) and the impossibility of HMRC trying to integrate the multitude of separate incompatible systems that they have created over the years.

If the Government really want the best Digital Tax Administration in the World, then it needs to start from scratch with Sensible year end dates, a massively reduced Tax Code and a more digital way of looking at the problem. In the meantime, MTD will go down in history as one of the worst failures by Government which has probably already cost in excess of 3,000 million pounds with just about nothing to show for it.

Thanks (8)
Replying to Tornado:
By CJaneH
08th Dec 2022 17:18

A System designed by and overseen by people who do not understand bookkeeping and accounts let alone the difference between the two would never work!!!!

Thanks (6)
Replying to Tornado:
paddle steamer
12th Dec 2022 11:15

Like a puppy is not just for Chrismas, accounts software is not just for tax.

I use accounts/management software (Landmark Key Prime) that does far more than mere tax reporting , it monitors our input leases, auto produces rental invoices re same and a whole lot more.

You have to allow that one size does not fit all.

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By Winnie Wiggleroom
08th Dec 2022 16:49

But thats the problem with any automatic system isnt it - you start to assume that it is working when it might not be, and you stop looking and thinking for yourself (until it falls over and theres no one there to blame but yourself).

Just take a look a look at the mess people get into using software because the software company markets it as "running itself" with a few clicks here and there.

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By Hugo Fair
08th Dec 2022 18:40

I doubt you'll ever get a software publisher (let alone the developer if different) to accept responsibility even for direct software errors (such as failing to comply with the HMRC spec) ... culpable for the error, yes - but responsible for the consequences, no.
Just look at their Licence T&Cs (they've had 40 years to get these watertight).

So getting them to acknowledge even a moral responsibility for an error within validation or nudge routines is an absolute no-hoper. These are immensely complex - see HMRC's internal manuals and GOV.UK for examples of how quickly the relevant facts are obscured in the chase for simplicity for the masses who require instant answers.
HMRC admitted this to me (back in the days just before RTI) when I suggested that their then Accreditation (now Recognition) scheme should be expanded to look at *how* the user was guided to perform the most basic payroll operations ... the look of horror on their faces when they thought about trying to establish the exemplar case studies (let alone cross-checking data entry on the fly) was a wonder to behold.
Thus my attempt to lure them gently towards them specifying a full-blown set of nudges was dead in the water (despite my naked attempts to cajole them with promises of 'cleaner data', 'fewer queries', 'improved efficiency', 'lower costs' etc)!

And before anyone points out this was over 10 years ago ... the fact is that the likelihood has decreased, with the rate of increasing complexity of tax law (and not just the law but the circumstances in which businesses and people now operate in short-term opportunities that regularly cross business & geographic boundaries).
A.I. *could* help ... but only *after* the legislation has been extensively simplified AND if you're prepared to hand control to a 'black box' (as the only proper AI systems are already beyond the capability of even their developers to peer inside ... the software 'teaches' itself through deep learning but doesn't create a trail of how it then applies this learning)!

None of this is to say that commercial software shouldn't contain a greater range of basic checks & balances - but that's not the same as a full nudge system nor remotely foolproof (and I seemed to spend a lot of time in the past switching off my 'cleverer' routines that may have been helpful but were seen by most users as an irritant that slowed them down).

Thanks (1)
By Catherine Newman
08th Dec 2022 19:02

I received information from a client today using Quickbooks-P&L 01.04.21-31.03.22-just the job. Supplementary reports-tax 06.04.21 to 05.04.22 with disallowable expenses. Turnover for a start was £3K different.

There were other issues with her partnership spreadsheet. She apologised profusely, said she is doing things late at night and said she is just pressing any button and glad that I am a friend and spotted it.

Sound familiar?


Thanks (2)
By adam.arca
08th Dec 2022 19:16

I really don’t see hints and nudges being a goer.

Why would a software developer include these when (T&Cs not withstanding) a failure to be comprehensive or clear lays them open to customer dissatisfaction at best and legal action at worst?

If I were a developer, the only way I would include these would be if HMRC were responsible for supplying the definitive list which all products would incorporate. But HMRC aren’t going to do that for exactly the same reasons that developers aren’t going to develop their own lists.

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By ireallyshouldknowthisbut
09th Dec 2022 10:28

Specific message can work in the short term.

They did an experiment with the old VAT portal if you recall, with a big red warning along the lines of "have you checked this properly?"

Tax revenue was up I think for 2 or 3 quarters.............but then presumably fell back to the normal level as people got used to it.

However what doesn't work is trying to condense 1000's of pages of tax code into computer software with a myriad of nested warnings coming up.

If its good enough to cover even 90% of cases, the average user is not going to understand the question. Moreover they will get to the "just click through it quickly" stage and not bother reading any of it if the warning has not applied before, and hugely hit productivity if every entry hits a nest of "what if, and maybes"

As even it the long term user which is very hard to test. Most tests of this stuff concentrate on a specific period.

This is really where the trained human brain is so plastic, as it can pull out issues really well. Computers aint that good for thinking, they are great at adding up and manipulating data.

Thanks (1)
By ColA
09th Dec 2022 10:41

On the question of trusting software years ago a large bakery & supermarket operator switched to digital payroll processing but the stalwart payroll manager resolutely kept parallel manual records for months after the changeover.
Long swallowed up by one of the four majors I wonder if there is a blue plaque at Netherton to commemorate her efforts.

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By anthonystorey
09th Dec 2022 11:47

Could be another subpostmaster/mistress scandal on the horizon (pun intended).

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By johnjenkins
09th Dec 2022 12:15

Isn't that the object of the exercise? Everybody can blame anybody with nobody actually taking the blame.

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By dmmarler
09th Dec 2022 12:46

Your leading question mirrors something which happens all too frequently. Non-qualified in house bookkeeper submits company books annually to an external qualified accountant, who has been asked to translate accounts to appropriate format, and submit to Cos Hse and HMRC (loss-making organisation). None of the directors are qualified. The qualified accountant had been recommended to the directors by another qualified acountant on the basis all the work was done by the bookkeeper... so minimum hassle and a low fee. Suddenly the accountant finds the VAT limit has been exceeded because the bookkeeper has misunderstood the information received or whatever. Technically the Directors are at fault as they did not understand what they were doing ... but no-one is going to come out of this well.

This is the sort of scenario which nudges will help, but only if the directors spend the money on the right software at the outset. Who is going to guide them?

There are umpteen small companies (and traders) who do not have any accounting knowledge, and they really need to understand what they are doing. They do not want to pay for advice or appropriate tools. This is where the problem lies.

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By Paul FD
09th Dec 2022 14:04

There is a wider issue here in that many large oganisations, including Government, rely completely on the digital system so fulfil their responsibilities/offset blame. Thier computers talk to my computer which, of course, means they can all say - well we told you. The schmuks who try and run a small business nowadays are on the receiving end of a constant barage - amusing entitled - prompts and nudges of these things; but can they can keep up? It simply means that the poor individual on the receiving end can be blamed for all their misfortunes and be fined to kingdom come. The worst of it is that we are utterly powerless to stop it. The politicians haven't clue.

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By moneymanager
09th Dec 2022 17:55

In seemingly a prior life, I managed some chain store outlets and converted them from manual acccounts and stock control systems to a steam driven, i.e. very simple, computer system, days later there was a widespread power outage and sales ground to a halt; we are being told that electricty is in short supply and computer chip (silicon wafer) production is almost entirely in the hands of China (including Taiwan) and Israel, I'm not sure this is sustainable.

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By moneymanager
10th Dec 2022 10:11

Prompts and nudges are only thought required because it is supposed that people might otherwise get things wrong, too often that is as a result of the needlessly complicated tax code and also the sometimes misleadingHMRC's own filing interface.

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By tedbuck
12th Dec 2022 15:01

Pity they can't just get the system working properly

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By kevinringer
14th Dec 2022 07:15

I had to laugh when Paul mentioned AI. Software doesn't need AI. Software needs to have basic controls built into it. For example, we have clients who use Sage 50cloud. Sage defaults all transactions to standard rated and by default reclaims VAT on wages, insurance, drawings, even the VAT payment if input manually. What is more, I have seen clients and even bookkeepers accept the software's default and reclaim the VAT on all these. You don't need AI. The software developers should know what expenses shouldn't have VAT on them and should make their software not default to standard rated.

I used Quickbooks receipt capture function for a tax bill. It asked me how much VAT I would like to claim back. It offered me 20% as the first choice. I accepted it, and the software duly claimed 20% of non-existent VAT. Again, the software should know there is no VAT in tax, therefore it should know not to claim it.

AI is not needed for any of this. Tax knowledge is. MTD ITSA is trying to make millions of Joes the Plumbers into bookkeepers: people that know about plumbing, but not bookkeeping or tax. The software industry could improve their software, but the industry's stance is "why bother" if they don't have to. The areas of VAT that caused the greatest confusion for clients are schemes such as margin, retail, partial exemption etc. These have been in place since 1973 yet none of the mainstream software automate these. And instead of HMRC forcing the software industry to automate these, HMRC let them continue to be lazy.

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By kevinringer
14th Dec 2022 07:25

Paul gives the example of VAT registration due to exceeding turnover. This is one that software should definitely monitor. HMRC is telling Joe the Plumber to use software himself. Joe knows that his smartphone apps can be very clever. So he'll assume his MTD ITSA software will be just as clever. As HMRC have told him to use the software, Joe will assume that HMRC checked the software to make sure it is robust enough to be used by someone like Joe without any bookkeeping or tax knowledge. If the HMRC-insisted software doesn't give him any warning he's exceeded the VAT registration threshold, is it Joe's fault the software doesn't tell Joe?

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By kevinringer
14th Dec 2022 09:25

"At the end of the day, the decision comes down to something that software and AI will never replicate: professional judgment."

Exactly: and that is why MTD ITSA is a different beast to MTD VAT. MTD VAT is simple: just list the income and list the expenses. MTD ITSA requires judgement that is not required for MTD VAT such as capital v revenue, apportionment of transactions.

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By kevinringer
14th Dec 2022 09:54

I attended a HMRC MTD meeting in 2016. At the time, HMRC said that the prompts and nudges would be an essential part of the MTD and therefore would be controlled by HMRC. HMRC said at the point of the prompt and nudge, the third party software would pass control to HMRC who would display the prompt and nudge. I understood it would be similar to what currently happens when software reaches the 18-month re-authorisation event and a GOV.UK page appears for the authorisation process. The agents in the meeting told HMRC that whilst Joe the Plumber would need every prompt and nudge available, agents would need to be able to switch them off: I feared we'd be presented with reams of info similar to the toolkits (toolkits have their uses for transactions and events we encounter infrequently, but we don't want to have to work through a toolkit for every transaction). In the 2016 meeting, we questioned how technically feasible it was to continually pass control backwards. HMRC said they were confident it would work. The main point I took from the meeting is that none of the HMRC people at the meeting were tax people: they were all IT and didn't know anything about tax. That explains why so little progress has been made with MTD ITSA.

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