Tax software standards need independent scrutiny

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HMRC sets the standards for tax return software, which all software producers must follow, but no one checks whether those standards are in line with the tax law. This has to change.

Tax computation confusion

This year’s tax return season has been plagued with problems concerning the SA tax computation for 2016/17. The alarm was first raised by Tim Good and Giles Mooney of Absolute Software, who found that HMRC was not applying the law correctly when allocating allowances for savings and dividends. This meant that tax software written in line with the HMRC software standards produced an incorrect tax computation in certain circumstances. The temporarily solution was to submit a paper tax return.

As the year progressed the number of problems with tax software multiplied, and HMRC attempted to list all the situations in which a paper tax return should be filed in their SA individual exclusions list. In October 2017 HMRC issued a fix to the tax return software standards, which when incorporated into tax software, would allow many more tax returns to be submitted online.

It’s getting worse

This month further problems emerged with the SA tax computation, and HMRC issued version 9 of their exclusions list for 2016/17. The current advice from HMRC is to submit tax returns online where possible and sort out the tax computation mess later (see How to react to the new online filing exclusions). 

The tax computation for 2017/18 will be even more complex as two £1,000 allowances for trading income and property income came into effect from 6 April 2017. Also the higher tax rate threshold differs for non-savings and non-dividend income received by Scottish taxpayers.

I don’t know how HMRC will cope with all the possible permutations or income, allowances and rates for 2018/19. For that year there may be five Scottish tax bands and rates, all of which will start at different thresholds to those which apply in the rest of the UK, but only in respect of non-savings and non-dividend income received by Scottish taxpayers.       

Why does this matter?

Taxpayers should pay the right amount of tax, as determined by tax law and not by HMRC’s software standards. The Taxpayers’ Charter (aka Your Charter) states in point 2.2 that that taxpayer should work with HMRC “to make sure that your tax and payment affairs are right and that you’re paying and claiming the correct amount of money”.

If the tax software standards produce the wrong answer and the taxpayer pays too much, or too little tax as a result, he or she is disadvantaged, and in my view HMRC has failed to uphold Your Charter for that taxpayer.

In many cases, the taxpayer won’t realise that they have paid too much tax, or claimed an incorrect amount of tax relief, if the HMRC computer system doesn’t pick up the error. This has happened with excessive claims for foreign tax credit, and for losses set-off (see article by Glenn Collingbourne in Taxation Magazine 24/09/2015).

In the case of Andrew Scott (TC05851) the tax computation was performed by commercial software incorporating HMRC’s software standards. It taxed his gains at 20% due to a very unusual combination of income, gains and losses. HMRC initially accepted that tax calculation, and in the agreed facts of the case it was noted that if the taxpayer had attempted to submit a tax return including a calculation that did not agree with HMRC's systems' calculation, the attempted submission would have been rejected by HMRC's system.

After the enquiry, HMRC concluded the gains should be taxed at 40%, which produced an additional amount of tax due of £4.8m. In evidence, HMRC said that there were 12 other identified cases with the same tax computational problem, and the total tax at stake in those other cases was £23,000. However, HMRC refused to take responsibility for the incorrect initial tax computation and maintained that the taxpayer was responsible for his own tax return and the tax calculation.

Conflict of interest

HMRC has a conflict of interest. It sets the standards to which tax return software must comply. If the commercial software does not comply with those standards the tax return will not be accepted as a valid online submission by the HMRC computer. Whether this is the correct position in law is a point which will have to be tested through the courts.

HMRC are also responsible for collecting the tax due. There is no incentive for HMRC to correct errors in software standards which result in more tax being paid than is due, and those errors could go unnoticed for years.

Where the error applies to more than one period, the earlier periods will have to be corrected by a resubmission or manual adjustment of the return. If the taxpayer doesn't know about the error in the tax calculation he can't make the correction.

Implications for MTD

As we move rapidly towards the implementation of MTD for business, it is essential that there is absolute trust in the software behind the tax calculations. If no one can independently verify that the tax software is correct, that trust will be misplaced. 

Trust can only be gained by transparency. If it is not possible for the taxpayer or their tax adviser to work out how the software has performed the tax calculation, there is no transparency and no trust.   

Independent oversight

If the HMRC standards for tax software produce an incorrect tax computation, it follows that all tax return software which incorporates those standards will produce similar incorrect results. However, it appears that no one checks that the HMRC standards are in line with the tax law.

I believe that there should be an independent standards committee to review and verify the standards set by HMRC for all tax software, covering all taxes. This work cannot be carried out by one of the professional bodies, as they would not be seen to be independent.

I suggest that the tax software standards committee could be run by the British Standards Institution(BSI), who already monitor standards for a large range of industries. This committee would need to include both tax law and tax software experts. Their task would be to review the software standards drawn up by HMRC and verify that those standards were in line with tax law.

 

Do you agree with me that the chaos caused by the 2016/17 SA tax return filing demonstrates that HMRC needs oversight in its role of tax software judge and jury?  

About Rebecca Cave

Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.

Replies

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29th Jan 2018 11:04

Hi I thought I'd chip in with my views as a software developer.

It's not an easy process to produce (or check) the annual tax calculation given by HMRC. If you look at the HMRC document (https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil...), the tax calculation covers 65 pages (with a font size of 10), and this excludes the payments on account section.

A recent tax case highlighted that HMRC doesn't include the tax treaty restrictions when calculating foreign tax credit. So the calculation could be longer and more complex if this is included.

So while I would be in favour of some independent scrutiny, we also shouldn't underestimate the time and resources it would involve. A highly skilled and specialised team could easily spend a year working through the legislation, checking and rechecking calculations, getting input from other specialists, setting up test cases and working with software providers to run through hundreds of test scenarios. And, at the end of that process, it may still not catch every possible scenario.

It's one thing to pick holes in someone else's calculations several months down the line (and I agree it's been far too easy this year). But it's another to have a 100% correct tax calculation in place and ready to go by 6th April, and where you're happy to sign it off and stake your own reputation on its accuracy.

Matt Bailey
Gbooks

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to MattBailey
29th Jan 2018 14:14

Great Article.
Matt, I know what you are saying but surely if the tax payer is paying for a service to take money from them it makes sense that that serice should be in agreement with the law, regardless of how long it takes to complete.
Either that or HMRC drop the penalties, realising nothing can be perfect.

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to johnjenkins
30th Jan 2018 20:48

The problem is that the goalposts move every 5 minutes - and in very serious ways just in return for a tiny amount of (perceived - and very shortlived) political capital.

It's actually more of a problem for HMRC's software which (surprise surprise) lags the (in my experience) very diligent work of the private sector providers.

I'd like to say something like "let's just all work together to get to a common goal" but I know that, in practice, you just can't involve HMRC/government in anything as they are completely incompetent and driven by having 100s of meetings and achieving nothing. Then penalising everyone else as a result. I'd laugh but it's too true!

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By SM80
to MattBailey
09th Apr 2018 15:00

Fair comment. But I think the key here is driving change in HMRC's behaviour. The proliferation in, inter alia, the tax calculation is a result of one of two thing (I think): 1) HMRC suggesting various reliefs and tweaks to the law or 2) HMRC not being robust enough at a senior level when responding to Ministers about what is achievable. If we make HMRC more accountable, it may make them more robust about what is achievable in future.

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29th Jan 2018 11:50

Rebecca - a clear well argued article as always.
The lack of clarity re tax software and the lack of available information about a taxpayer's affairs (I still don't know why there was underpaid tax of £80 to be collected when I did my SA return this year, but it would seem to date from 14/15 and I lost the will to live trying to track it down) but I think the software vs legislation problem goes deeper than this.
Financial reporting software presents similar issues as does audit software.
At our AGM last year, a member of SPA (Society of Professional Accountants) raised the question of the liability of a practitioner using or recommending software for submission of clients' financial information to HMRC or Companies House, where an error occurs due to faults in the software and which may not be covered by PI insurance. It's a very tangled web indeed.

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By rbw
29th Jan 2018 11:53

I suggest your proposed solution comes at the problem too late. What is needed is the tax calculation to be addressed when legislative changes are proposed. It should be part and parcel of the impact assessment, of discussions with practioners, consultation on draft clauses, etc.

Bear in mind too this: if HMRC can't get the calculation right, how confident are they in the forecasts of costs/yields/winners/losers from the change?

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29th Jan 2018 11:59

I'm not in favour of a new layer of bureaucracy to deal with this problem.

There is a much simpler solution: where a taxpayer relies on software that conforms to HMRC's instructions as of the date of filing, then that is the amount of tax due, unless the taxpayer is found to have over paid, in which case a refund should be issued.

This puts the onus on HMRC to ensure they get it right first time, and gives taxpayers certainty. Yes, some taxpayers may benefit from this, but that is HMRC's problem, not ours.

No need for another long convoluted process to be inserted. The presumption should always be that compliant software gives the right answer and any errors made by HMRC should always be corrected in the taxpayers favour.

After all, we're all 'customers' and so should expect a minimum level of 'service'!

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29th Jan 2018 11:59

In addition to the points raised about computational errors, I note that HMRC also has a habit of adding additional queries and validation checks to the submission process which aren't in the returns themselves. Examples include the iXBRL minimum tags (some of which are not required in accounts under GAAP so need to be added), questions regarding personal service companies, and so on.

Strictly these questions should be put through the same approvals process as the return itself, but I'm not aware of any external monitoring of this area.

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29th Jan 2018 12:03

For many years the HMRC has been giving misleading information to taxpayers in a form that for a commercial organisation could be regarded as tending to fraud and certainly with an intention to mislead. I give below a standard example taken from HMRC's Self Assessment website.

• You have a total of £3513.67 becoming due for payment. Your next payment is due on 31 Jan 2018. For details of the amount and the date of payment please select the figure of tax becoming due.
• GBP3513.67 will be due for payment and a breakdown of this amount and when this needs to be paid by is outlined in the table below. Follow the appropriate link within the 'Description' column to find out more about each payment.
• Description For
Due date
Amount (£)

• Tax year ending 05 Apr 2018 First payment on account 31 Jan 2018 1668.86
• Tax year ending 05 Apr 2018 Second payment on account 31 Jul 2018 1668.86
• Tax year ending 05 Apr 2017 Balancing payment 31 Jan 2018 175.95
Total 3513.67

Please note that the payment due on the 31st January is £1,668.86 plus £175.95, that is £1,864.81. An average taxpayer could be easily misled into thinking HMRC were demanding £3,513.67 for payment on the next payment due. It should be a simple matter to arrange for the total due on 31 Jan 2018 and the second payment on account to be shown separately thus avoiding the accusation of misleading the less aware taxpayer .

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By ShayaG
29th Jan 2018 12:06

An obvious solution is to stop inventing new allowances, rates and bands, and to ask the chancellor to achieve any desired fiscal results by simply altering the existing tax rates. But then that would be political suicide. He or she could not obfuscate if taxes went up.

In the end of the day we the public have got the (flawed and illogical) tax system because we were too immature as a society to have a frank conversation about money.

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29th Jan 2018 12:07

Yes there should be oversight. My reasons for agreeing are in the thread https://www.accountingweb.co.uk/tax/personal-tax/new-sa-errors-emerge-du...

But BSI is a top-heavy organisation that was at one time an altruistic non-profit but now charges enormous fees for everything it does and IMHO exists to enrich its senior management. Their own website describes it as a 'Company' and says in respect of their last financial year: 'Record underlying profit delivered organically and through acquisitions'.

I can see a risk that the costs of external supervision will be charged back to the software houses who will then add it to their their charges, so the cost needs to be kept as low as possible. BSI is NOT the answer.

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By Tornado
29th Jan 2018 13:30

The most logical solution, of course, is to make the tax system simpler in the first place.

Instead of constantly trying to deal with the symptoms of the disease, we should really be concentrating on tackling the disease itself.

Good article as always Rebecca

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29th Jan 2018 15:28

I'm with Digita and my understanding of the situation is that their calculations produce the correct result regardless of the HMRC position. I seem to remember I was also given the option to file either the HMRC figure or the correct figure (correct figure via paper). If I file on paper after the paper deadline then they will issue a penalty which I would appeal on the basis they incorrectly rejected it. I could take that as far as any other tax dispute then.

The PI issue is key as I pay Digita to supply tax software that is compliant with tax law. That is what they set out to do.

When HMRC did their corrections before Christmas there were no changes to my software it was just that more cases would now file properly and I remember holding submission on one for HMRC's corrections.

Surely where there is a difference of opinion between HMRC and the software houses tax experts - or individual tax experts - there needs to be collaboration and maybe then some one who can arbitrate (office for tax simplification? - if they'd been better they wouldn't need to do this).

At the end of the day we all do this - look at the law and see if we think our client's are within it. I guess I am quite within my rights to argue any calculation by either HMRC and my software house or both. There will always be the need for human input for different reasons.

What we need are a tax authority that when they get it wrong apologise and put it right and a chancellor that understands the implications of his latest "bright" idea. Maybe even a rule that said if he/she was changing the way tax is calculated (rather than just a rate) it would only take effect in the next but one tax year.

M

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30th Jan 2018 10:15

NEA's tax system.

0 to £15k: 0%
15£ to £50K: 25%
Over £50K: 42%

No other reliefs, allowances, tax and NIC scrapped etc just 2 simple rates. These are set to keep revenue neutral and increased up or down as required.

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By Tornado
to North East Accountant
30th Jan 2018 11:50

A shocking suggestion.

Think of the tens of thousands of civil servants, accountants, financial advisers and bankers who would be made redundant if tax was that easy.

Unfortunately it is a fact of life that the more complicated something is, the more people are required to run it, which is great news for some.

Much like the ridiculous situation where we have two separate tax systems at the moment, one called Income Tax and one called National Insurance. We only NEED one tax system but the political fall out from combining the two would condemn any Government that did it to the wilderness for ever.

It does make a lot of sense to simplify the tax system, and hopefully there will be moves to do this in the near future, or at least a curb on any attempts to add to the complexity of it.

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to Tornado
31st Jan 2018 13:10

As per ICAEW "Professional Accountants have a responsibility to take into account the public interest and personal self interest must not prevail over those duties."

The tax system is not meant to be a jobs program for thee, me and everyone else.

I don't see how making the system simple enough that the average taxpayer can actually understand the basis on which he/she pays tax is shocking.

Surely the public interest is best served by a simple system that people actually understand.

Of course, it will never happen so plenty of work to do to keep us all out of mischief!

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31st Jan 2018 08:28

Hi Rebecca,

I agree that the issue with the HMRC computations this year caused many challenges for software developers, and their clients. However, I would not describe the published HMRC computation as a standard which all software producers must follow. We have never relied on the published computation and have always maintain our own tax computations within our software. Where there are differences between the HMRC published computation and our own view, these are raised with HMRC as soon as possible. Needless to say, over the last year or so we have been very busy pointing out issues to HMRC!

Many thanks
Mark Purdue
Product Manager – Tax Products
Thomson Reuters

Thanks (2)

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