Digital tax risks: lessons for the UK from Australia
As a chartered accountant, chartered tax adviser and chartered IT professional, Donald Drysdale contemplates digital risks facing taxpayers and tax authorities. The views expressed below are his own and not necessarily those of ICAS.
Setting the scene
This article reports on two apparently unconnected events in mid-March 2017 – a speech in Adelaide, South Australia, and the publication of a report in London.
On 16 March Chris Jordan AO, Australia’s Federal Commissioner of Taxation, delivered an address to the 32nd National Convention of the Australian Tax Institute. Jordan, a former policeman turned chartered accountant and chartered tax adviser, was appointed Commissioner of Taxation at the Australian Taxation Office (ATO) on 1 January 2013, having previously been Chairman of KPMG in New South Wales until 2012.
On 17 March the House of Lords Economic Affairs Committee (‘the Committee’) reported on its inquiry into the Draft Finance Bill 2017, in which it concentrated solely on HMRC’s plans for Making Tax Digital (MTD). The House of Lords, as second chamber of the UK Parliament, is regarded by some as toothless and archaic. However, it performs a crucial role, checking and challenging the work of the Government, and on this occasion the Committee expressed some very pertinent views.
Making Tax Digital
The Committee observed that under MTD as then proposed, 1.6 million companies, 2.4 million self-employed individuals and 900,000 residential landlords would have to comply with digital record-keeping and quarterly reporting. This included businesses that currently give their accountant a box of receipts once a year; sectors with seasonal or erratic incomes; rural businesses with poor internet connections; and ‘accidental’ residential landlords.
Digitalisation of tax administration to assist taxpayers is an objective the Committee welcomes. But it voiced concerns that the Government was wrong in the transitional arrangements it proposed, the treatment of the digitally disadvantaged, and the threshold for inclusion.
The Chancellor, in his Budget announcement of a 12 month delay in imposing MTD on businesses below the VAT threshold, had already appeared to acknowledge some of these concerns. However, the Committee reported that this delay did not go far enough as it failed to address concerns about MTD’s underlying evidence base, design, piloting, roll-out, and scope.
The Committee recommended four fundamental changes:
- The Government must improve its assessment of the benefits and costs of MTD.
- MTD should remain optional for businesses below the VAT threshold.
- The launch of MTD should be delayed until 2020 – thus allowing time for a pilot covering a full tax year, a review of its findings, and further consultation before MTD launches.
- The Government should look again at the wide variety of businesses to assess whether some, such as those with seasonal or highly irregular income, should be outside MTD.
When MTD was first announced in 2015, its alleged purpose was to “make tax easier”. The Committee concluded that for many businesses MTD would no longer achieve this but would make tax more burdensome instead.
Events have now overtaken us. With the announcement of the forthcoming General Election, much of the Finance Bill was abandoned in the pre-election ‘wash-up’ process. The Finance Act 2017, which received Royal Assent on 27 April, makes no mention of MTD. The proposals are likely to re-emerge under an incoming Government of any political persuasion, but perhaps there is now hope that politicians and HMRC will use the extra time to reconsider some of the more damaging impacts of MTD.
I had previously voiced concerns about risks associated with MTD.
Taxpayers face risks if they maintain records digitally or conduct business online. Risks of viruses or malware corrupting data. Risks of online fraud, with data or identities stolen and misused. Risks of hardware or software failure, where data – however carefully protected and backed up – may be lost.
Taxpayers already transacting business online, voluntarily, may be assumed to have taken responsibility for protecting themselves against the risks involved. However, where they are forced to do so by HMRC – especially where this creates a need for knowledge, skills and resources beyond their reach – it is arguable that HMRC has a moral, ethical and legal obligation to protect the taxpayer against any resulting loss.
Problems down under
It would be foolhardy indeed if HMRC were to disregard such concerns by proceeding as though MTD will be safe for taxpayers and the tax authority. A startling illustration of this comes in the form of recent events in Australia.
On 12 December 2016 the ATO suffered a major outage of a range of critical online services. This was caused by hardware faults in their primary storage area network (SAN) provided and maintained by Hewlett Packard Enterprises (HPE) on their behalf. The SAN is not old equipment, having been installed in November 2015 when it was seen to be ‘state-of-the-art’.
A further outage occurred in February. As part of the work to stabilise the faulty SAN, an element of critical hardware became dislodged when a faulty cable was being replaced. This caused the SAN to enter shutdown mode, which disrupted a range of critical ATO services, similar to the scope of systems and services impacted in December.
The SAN hardware in question is similarly installed in many large organisations worldwide, supporting major business functions including mission-critical operations like trading floors and banking platforms. Nothing like the failure at the ATO had been experienced by any HPE client before.
On behalf of the ATO, PwC are now conducting an independent review into the nature of the failure(s) and their root cause(s), the adequacy of back-up and contingency arrangements, and what needs to happen to minimise future risks. HPE are also undertaking a root cause review of the outages.
Addressing the National Convention, Jordan said:
“The experience of the outages caused me to reflect on how much all of us are now reliant on technology and digital services – seemingly regardless of what industry you are in. It is a fact of life – we are all dependent on our phones, computers, and 24/7 systems availability, and the reality is that occasionally, they will fail.
“It highlights how important it is to have business continuity and contingency plans – what do you do when the system goes down? The power goes off? A telco shuts down? Or the bank is offline?”
In the UK, I am sure HMRC have comprehensive business continuity and contingency plans. But what about all the thousands of small businesses who were about to be forced into MTD – and probably still face that fate after the election? Would they even maintain adequate data back-ups? And would they be able to access their data if their cloud accounting provider had gone bust?
The way ahead?
Chancellor of the Exchequer Philip Hammond must still be feeling raw after the public mauling that forced him to abandon his Budget proposals on Class 4 National Insurance, all because of a rash manifesto commitment by his predecessor George Osborne. Should he retain office, this might make him all the more determined to stick to his guns on MTD – another of Osborne’s pipe dreams.
But can any Chancellor – and the country – afford to run the risks involved? Risks that MTD will hit small business productivity when they can ill afford it because of Brexit uncertainties. Risks that implementation problems will discredit MTD or cause it to fail. Or risks that businesses forced unwillingly into digital will face serious disruption as a result of unexpected hardware or software failures.
It seems that the ATO have been very unlucky. Nonetheless, if digital technology has failed the likes of them and HPE, what grounds have HMRC for believing it will work for businesses such as the sweetie shops in Auchtermuchty or Minchinhampton?
Article supplied by Taxing Words Ltd