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The slow ascent up Mt Digital

23rd May 2016
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"All revenue bodies," reads an OECD forum on tax administration white paper, "are confronted with the goals of making it easier for taxpayers to comply with law (i.e. reducing their compliance burden), improving taxpayers’ compliance and increasing administrative efficiency."

Without knowing it, the OECD described the professed aim of  Making Tax Digital, the government's frustratingly elusive, epochal tax transformation. 

We don't know much about MTD. That's not a stunning admission, perhaps; the information drip from Whitehall has been but a slender trickle.

We know that the consultation documents are ready but will only be released in July, after the Brexit referendum's purdah is lifted.

We know, for a fact, that the digital tax wheel is turning."

We also know some fundamentals like: HMRC will gradually introduce quarterly reporting from April 2018 onward for income tax and NI, culminating in April 2020 when everyone (from corporation to landlord) will report quarterly.

That's largely it. But as frustrating as it is, there is another way we can attempt to make sense of digital taxation.

The UK isn’t the first country to move to a digital tax system. Other countries have already - some quite a while ago, in fact - made the daring trek up Mount Digital.

What do we know about the countries' tax administrations and what does it mean in practice? 

Let's look at three examples:

Denmark, Australia and the United States

Mount digital

Denmark

When it comes to digital taxation, the Nords – as with many other things – have led the way. The tax innovations in these countries have fascinated policymakers for years.

Reporting on the Nordic tax administrations, the OECD said, “Over the last decade or so, revenue bodies in all of the Nordic region countries have been revolutionising their personal tax arrangements through the development of pre-filled tax return systems”.

Since 2002, the Danish tax authority has presided over a system of pre-filled tax returns."

Of these digital tax administrations, Denmark has led the way. Taxation in Denmark is administrated by Skat, literally Danish for “tax”. Since 2002, Skat has presided over a system of pre-filled tax returns.

“Every year, the Danish tax administration generates a tentative personal income assessment, which you need to verify,” explains Rasmus Corlin Christensen, a Danish political economist. “For the vast majority of individual taxpayers, they’ll have almost all details needed from your bank, employer, union, etcetera.”

For Danish small businesses it’s only slightly more complex. Small business owners, for obvious reasons, need to supply more information on the accounts of the business and their income. “There are also, of course, more favourable tax rules for certain small businesses/entrepreneurs,” says Christensen, thus leaving a gap for advisory services.

The largely digital and automatic tax system means there is no great need for special treatment for SMEs."

Denmark also has what Christensen describes as a “very integrated public digital service set-up for small businesses”. “There’s a one-stop-shop website for registration, reporting,” he explains. “But otherwise, the largely digital and automatic tax system means there is no great need for special treatment for SMEs in terms of the tax administration itself.”

The Danish tax authority is extremely adept at handling and answering queries. “Any changes to your personal or business tax assessment are easily handled through an online self-service platform,” says Christensen. “If there are any questions from the taxpayer side, the tax administration can be contacted through the self-service platform, via Facebook or Twitter, or in person at one of a number of tax centres throughout the country.”

Denmark has one of the most robust welfare states in the world. It’s an aspect of Danish society that Danes are very passionate about. To sustain the welfare state, Denmark is a high tax society. Despite the high tax, Christensen says Danes have a positive attitude towards tax collection. “It’s helped by most Danes having to do very little actively,” he says.

Danes have a positive attitude towards tax collection."

It’s not perfect, of course. There have been a few administrative scandals over the past few years, namely the dividend tax refund fraud case where foreign companies drained 800m euros from Skat. “They’ve also had major issues collecting billions in outstanding tax debts due to technical system failures; and the property valuation system has been heavily criticised due to unequal treatments,” says Christensen.

Largely, though, the system has been extremely successful. As the OECD commented, “Considerable resources, effort and persistence are required over a fair period of time to establish a comprehensive system of pre-filled tax returns.

“However, the potential benefits to be realised, as evidenced by countries such as Denmark and Sweden, are enormous and clearly justify the investments required.”

Australia

Since July 2005, Australia’s taxpayers have had online access via the Australian Taxation Office (ATO) to limited third party information to assist them prepare their tax returns.

"From this time, taxpayers filing electronically and in receipt of payments from Centrelink, the government’s welfare payment agency, were able to access payment information online through the ATO’s e-tax (electronic filing) capability," says Chris Hooper, chief executive of Accodex, an accounting firm in Adelaide. "Similarly, they also had online access to medical expenditure information from the government’s Health Insurance Commission via e-tax when preparing their return."

Hooper describes the ATO as "almost digital". The ATO's approach is probably the clearest picture we have of what HMRC's approach will have to be. Australia, much like the UK, struggles with potential digital exclusion.

But according to Hooper, the ATO has been succesful at managing digital disparity."

But according to Hooper, the ATO has been succesful at managing digital disparity. "I respect that they still need to meet needs of taxpayers and agents that aren't digitally inclined. They have made a commitment to a digital first policy through their digital transformation office and we're seeing continuous improvement from there."

The Australian example perhaps most closely mirrors what MTD could be. The main taxes all centre on a quarterly reporting regime. Income tax is collected by employer at payroll and remitted by employers each month/quarter through a system called Pay as You Go. "Goods and Services Tax," explains Hooper, "is remited by businesses each month/quarter on a Business Activity Statement. Typically calculated in an accounting app like Xero. It's pretty easy for tax agents to file the BAS to the Australian Taxation Office online."

As a final step, all taxable entities must complete a tax return at the end of the year. "The majority of these are filed online these days," according to Hooper and they can be "pre-filled" with all the data the ATO.

One day, simple taxpayers won't need to file returns."

The data for the pre-filled returns is "collected from different government agencies and corporations (salary, interest, dividends)," says Hooper. "This data can be loaded into tax software to reduce data entry and human error. Each year the amount of data increases. One day, simple tax payers won't need to file returns."

Notably, accountants have not been pushed aside. Throughout the ATO's transformation, it has been, explains Hooper, accountants "driving the dialogue with the ATO". "As our software becomes more sophisticated so do our expectations of the tax office."

The United States of America

In 2015, the American Internal Revenue service (IRS) collected $3.3 trillion in gross taxes from individuals, businesses and estates.

That astrononomical tax figure comprises 243.3 million federal tax returns and supplemental documents. Of that figure, 163.5 million returns and other forms were filed electronically.

In 2015, the American Internal Revenue service (IRS) collected $3.3 trillion in gross taxes."

In the US, everyone files a return to the IRS. If a person earns less than $62,000 a year, then you can use a system known as Free File. Under the Free File system, the IRS has partnerships with commercial software providers who provide free mobile apps. For most people with simple tax matters, software like TurboTax's free app, for instance, works fine. 

American employers are obliged by law to provide employees with a form called Form W-2 before the end of January. Form W-2 has all the information required to file, and the individual slots in the information into their app. This information must be filed by April 15. 

But instead of killing off compliance, the profession is still booming."

But instead of killing off compliance, the profession is still booming.

Many people have more complex affairs, explains Denver-based accountant Jim Marty. "For people who don't own real estate etcetera these apps are fine," he says. "For people who have complex affairs, though, they can't use TurboTax unless they really know what they're doing."

So in the US, practitioner-led filing is still very prominent. According to the IRS's data, 78.3m returns were filed by hired professionals. The IRS requires professionals like to file digitally with a system called e-file. Paper returns can be sent if "there's some special reason I need to file with paper," says Marty.

E-file was introduced in 2003. Tax preparers use commercial software that are, what the IRS calls, "authorised e-file providers". "I prepare the taxes in a commercial software. It's offered by private companies and it interfaces with the IRS system and files digitally." This is very similar to HMRC's proposed API strategy.

The IRS requires professionals like to file digitally."

To be a paid professional tax return preparer, Marty requires an IRS Preparer Tax Identification Number (PTIN). The IRS also provides a "Directory of Federal Tax Return Preparers with Credentials and Select Qualifications". "The directory," reads the site, "can help you find preparers in your area who currently hold professional credentials recognized by the IRS, or who hold an Annual Filing Season Program Record of Completion".

Professionally, Marty has no complaints. The e-file system is also very satisfying. "It's very accurate. You get a notice from the IRS right away that your e-file has been accepted.

"People complain about the tax system, of course," says Marty. "But whenever a politician wants to step in and change it, it never prevails.

"So it's here to stay."

Replies (7)

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By johnjenkins
27th May 2016 11:24

Brilliant article Francois. Two things that stick out like a sore thumb. The first - these countries have been doing it for years so they've had the pitfalls. The second and really more important - Billions being written off due to a technical fault. What chance HMRC??????????

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By Paul Soper
27th May 2016 11:55

On e aspect of digital filing which seems not to be commented on (yet) in the UK, but which is certainly hinted at here, is the greater degree of disclosure required from companies - to pre-populate a return or a digital account with details of dividends and interest it is clearly necessary to add dividend disclosure to the existing CT61 mechanism as far as interest is concerned and for this information to be provided digitally too. I suspect a nasty surprise for some small companies...

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By coolmanwithbeard
27th May 2016 11:57

Great article but actually Australia is very similar to us Goods and Services Tax (GST) is simply their name for VAT and we can submit that electronically now (direct from desktop QuickBooks) with an annual tax return presumably covering year end accounts. We cannot assume that the Australians submit business accounts quarterly.

I do like the idea of the information that is available being made available (who doesn't appreciate dividend data feeds from the commercial software providers) and we need more of that - but given that state pension data we can access is no more than the start of year estimate we have a long way to go.

We are going to need to take a position on things that are currently annual now such as stock takes. Capital allowances could work quarterly but a good AIA claim is likely to result in a refund!

Just some thoughts

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Replying to coolmanwithbeard:
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By playtime38
27th May 2016 12:40

All the bas return is the gst paid and the gst recovered and the net balance is what is paid. This has to be reconciled with annual accounts at end of year and just as well ato does not require accounts for tax because the clients on prop software debit hp instalments and the like to the cost of the asset instead of off hp account and without calculation of interest - it is usually a mess and net profit would always be 50% wide of the mark. but the instalments of gst and paye submitted quarterly is much better for fiscus and the client to manage tax payments. Also included in qtly instalments is a thing called pay as you go (not as you earn) which is like provisional tax levied on last years tax payable marked up by 10% and split into quarters - tough on the third year into business unless your accountants insists on you giving and estimate.

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Replying to coolmanwithbeard:
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By playtime38
27th May 2016 12:52

But the best system I have ever seen is Zimbabwe - yes Zimbabwe of trillion dollar banknotes fame if you mind. There because the president does not care if all businessmen leave the country tax is on a sensible Dec year end like usa (too bad for the stocktakers working all night on new years eve instead of dancing) What you do there is put your balance sheet and pnl on first col of spreadsheet, then you divide that into 12 cols and pay the tax on each month to be lodged and paid by 7th of month subsequent, If it varies with sales then adjust and have a good reason for doing so. Every business must buy a machine (like a fax special purpose only) and every invoice and receipt made out must be sent direct to tax office where is it digitally collated. What a magnificent system.

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By sengaprior
27th May 2016 14:23

It would be interesting to know what timescale these countries used from conception to implementation and if it was a gradual/staged process.

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Replying to sengaprior:
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By playtime38
28th May 2016 23:05

Australia took about a year to explain 1999 to June 2000, but most of that was explaining how gst worked - there are many exemptions on food medical education and the like which makes working out much more complicated, unlike New Zealand where gst is on everything. Zimbabwe I dont know, but I do know that they asked the ato for help. and the ato must have advised them of the rolls royce system where politics had not impact on the design????

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