The case for Making Tax Digital

You may have heard us talk a lot about Making Tax Digital (MTD) recently. But why is the Government so keen to press ahead with this project? After all, millions of taxpayers file their tax returns successfully now, so why try to fix something that isn’t broken?

Governments generally want to raise as much tax as efficiently as possible. Our current Government believe that the extra knowledge that they gain through MTD will enable them to both close the tax gap and combat deliberate evasion at a reduced cost. The extra knowledge gained using Big Data techniques will also enable them to plan their future spending and shape their tax policies to effect taxpayer behaviours.

Australia are already successfully using pre-populated data in their income tax returns and in a recent study they estimated that for every Australian dollar spent on digital service provision, the same service would cost AUD16 to process over the phone, AUD32 to deal with by post and AUD42 in person.

Pre-population of data is seen as key to the success of MTD for both individuals and Governments alike. How successful this aim will be will depend very much on how well the various systems holding the data are harmonised with HMRC’s servers. For example, in an ideal scenario, a taxpayer’s income tax return would be pre-populated with their employment income from the RTI data submitted by their employer, with bank interest received from the banks’ data systems and with pension and state benefit details from the Government departments’ data.

In terms of achieving this harmonisation, HMRC have a pretty poor track record of implementing new computer systems and this would certainly appear to be their biggest challenge by far.

But Estonia have demonstrated that it can be done. Estonia, a country with a new and unusually simple tax system, and a technological advanced culture including the fastest broadband in Europe, are already using digitalisation extensively in their tax system. The average Estonian tax return takes just 5 minutes to complete due to the pre-population of data already held on the Government’s servers.

That’s excellent news for Estonians, but just how far this ideal can be achieved in the UK, for all but the very simplest of taxpayers’ affairs, is difficult to foresee. The UK tax system has grown piecemeal over many years and is very complex. Consequently there are currently many sources of income (e.g. self-employed or rental income), claims, allowances, reliefs and expenses that cannot possibly be pre-populated into the tax return without some aspect of manual involvement.

So in conclusion, increasing the tax take at a reduced cost is why the Government see MTD as the future, but harmonising the data and reconciling the data that will never be pre-populated will be major problems to overcome before these aims can be truly achieved.