New US bill spikes free tax software alternative

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For years, US campaigners have called for a free, government-led software alternative for American taxpayers. Now, after aggressive lobbying by the software industry, a new bill will make this alternative illegal. Is this a worrying sign of things to come in the UK?

You might wonder why tech businesses like Uber get heavy investment and hype, despite haemorrhaging money.

There’s two reasons, really. One: there’s a lot more money floating around than there are good investments, so investors will just take a punt. You only need to be correct once. The other reason is that these companies are attempted monopolies.

Once the competitors are defeated, the company can simply do as it pleases. If Uber monopolises the taxi industry, for example, it could use algorithms to charge each rider a unique price tailored to be the absolute most that person can afford. No rate cutting, no competition, and in cities and towns with non-existent or crumbling public transport, this would be an incredibly lucrative racket.

There’s a step further than this, however: you could even enjoy a government-mandated monopoly.

Take a look at the US tax system. Over there, everyone files -- whether you work in a 7/11 or at Goldman Sachs. For most taxpayers, the filing is a simple procedure. The IRS already has taxpayers’ income information, it just needs confirmation and gives taxpayers a chance to take off any deductions and allowances.

The process is completed electronically and controlled entirely by for-profit companies. With one exception: taxpayers who make less than $66,000 can use Free File, a free tax software provided by a coalition of industry-leading tax software companies.

The Free File Alliance, as this coalition is called, offers a free tax-prep service to millions of Americans and, in return, the IRS pledged to “not compete with the consortium in providing free, online tax return preparation and filing services to taxpayers”.

And yet, the take-up of the free software is surprisingly anaemic. Just 3% of eligible U.S. taxpayers use the free program each year. If you can believe it, the Free File Alliance does very little to promote their software and the vendors use cross-marketing to upsell to paid products.

The user experience of the Free File alternative is another sticking point. In that it, by all accounts, sucks. In a congressional testimony in 2006, the American taxpayer advocate Nina Olson said navigating Free File “was a bit like living in the Wild, Wild West”.

To any common sense person, the answer would seem to be that the IRS should create a simple, free software for the American public. But the system has endured and now, after years of aggressive lobbying by the tax software companies, a new bill will make this alternative illegal.

ProPublica reported that congress is set to pass a bill that bars the IRS from ever developing its free tax prep alternative, casting the status quo in stone. Instead of a real alternative, especially for low earners, American taxpayers will have to live with Free File.

The software companies have long feared a legitimate government alternative. In an SEC filing, Blucora, which is a member of the Free File Alliance, explicitly labelled “governmental encroachment” as “a continued competitive threat”. This bill would eliminate that threat.

This provides an enormous captive market for the software companies. American taxpayers have Free File -- for the time being at least -- but the Free File Alliance’s good faith commitment to promoting the software and making it actually good is highly questionable.

As the journalist Tom Scocca lamented, “There is a decades-long ideological commitment to the notion that the nimble private sector can outcompete the government, but it is mostly expressed by taking away government functions and outsourcing them for profit, not by letting corporations actually try to compete”.

Back in the UK, we might recognise certain elements of this story. Making Tax Digital is remarkably similar to how filing is completed in the US. Taxes are prepared in an authorised commercial software, which interfaces with the tax authority’s system and files digitally.

Indeed, when MTD for income tax finally rolls around, the government has promised that software will be made available to those with the most straightforward affairs. Again, eerily similar to the US, this work won’t be undertaken by HMRC itself. Rather, the tax authority will work with the software industry to develop free software products.

It’s worrying, perhaps, that the government has maintained an unclear position on who can precisely can benefit from free filing software. And how this software would be put together. If the US is anything to go by, then taxpayers in the UK have every reason to be concerned.

About Francois Badenhorst

Francois

I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter. 

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12th Apr 2019 09:52

In all honesty, who in their right mind would trust any software produced by HMRC. We've seen repeatedly that they don't do IT well.

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12th Apr 2019 10:50

I agree with SteLacca. HMRC should concentrate on what they do and not waste resources on trying to develop software for the taxpayer (which will, in any event, be awful). Since MTD for VAT only impacts businesses turning over at least £85k, there is an implied presumption that they can afford at least £60 pa to pay for the cheapest compliance software. By the time that MTD for income tax comes in, most banks (and other organisations utilising Open Banking) will offer tax filing as part of their offering (like Coconut or CountingUp do at the moment, albeit for a small cost). It will then be very cheap or even free (funded by advertising and sponsorship, like Gmail or Spotify).

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to charliecarne
15th Apr 2019 09:56

Hi Charlie, I must say I disagree with you. The point isn't that government should be the only option, but that it should be an option.

These companies can freely compete with the government option if they'd like. Surely, if government is so inept, they'd have nothing to fear, although one wouldn't know that from how the software companies have behaved in the US.

What is wrong is creating a captive market through legislation and then allowing private firms to effectively act as highway men to charge people -- particularly vulnerable people -- for fulfilling legal obligations.

As an addendum, your assertion around 'free' services funded by advertising being a desirable outcome. I dunno... Google and Facebook et al's model hasn't really worked that well for us.

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By AWebbie
12th Apr 2019 11:03

With respect, I think both the first two replies are rubbish. HMRC already produce a full specification for a tax calculation - in an impenetrable format that no amateur can decipher. It would be a relatively trivial process to provide it in the form of an Excel spreadsheet. That would put the onus onto the software companies to provide genuine added-value

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to AWebbie
12th Apr 2019 12:11

AWebbie wrote:

... HMRC already produce a full specification for a tax calculation ...

Huh! - if only. The facts are that HMRC produced "a full specification for a tax calculation" again and again - all of them seriously faulty - and the bulk of "software companies" slavishly copied those faults into their implementations.

The interesting question is what changed last year between late spring - at which point HMRC said "right, we give up on this year's system - file on paper and we'll try to get it right for next year" and early October when HMRC reversed and brought out very much improved SA software. Knowing the answer informs the debate about HMRC's role in the development and fielding of official SA software.

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12th Apr 2019 11:13

I have for sometime said that the "free HMRC software" should be discontinued. I see no benefit to the majority of taxpayers in funding it. For those who have to complete a tax return and have income less than the personal allowance plus £500, HMRC could give a tax credit of the average cost of software I guess around £35.

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12th Apr 2019 11:24

HMRC (and most Government) IT projects that go awry are major projects where they attempt a big bang approach and/or don't manage the scope of the deliverables effectively.
However, given HMRC need to implement the compilation and calculation of tax on their internal systems anyway and that the logic layer should be separate from the presentation layer, it should not require a significant effort (in the scale of the systems) to implement a separate presentation layer for the taxpayer and to expose the APIs to the logic layer to 3rd party developers.
The main issues are the ridiculously complicated tax code and a dependency on legacy/unconnected systems. (Look at long established banks that are basically in same situation, and have had chaos in some transitions.)

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to starbanana
12th Apr 2019 13:21

I assume that you haven't worked in HMRC, and so are not familiar with their internal exception lists requiring manual intervention to correct calculations in their internal systems. Said lists go on, and on, and on.......

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By edhy
12th Apr 2019 13:31

Is the software charges (for individuals) tax deductible expense? If not these should be.

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16th Apr 2019 11:51

Odd this one,HMRC used to provide free software for filing Vat returns, Corp tax, ....... but are slowly and surely removing it. The software was okay for filing returns.
This was a free filing tax software, I quite liked it.

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