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.
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.