Monday 26 September 2016

Tax and software

Here is the response I have just sent to the HM Revenue & Customs consultation paper "Making Tax Digital: Bringing business tax into the digital age", which is available here:

I write in response to the consultation paper Making Tax Digital: Bringing business tax into the digital age, published 15 August 2016. I write as a private individual, not on behalf of any business or organization. (I used to be in charge of tax policy for the Institute of Directors, but I left that post in 2013.)

I only have comments on one topic, the supply of software to taxpayers to enable them to work within the proposed digital system.

The proposal is to make people use software from suppliers who have obtained the approval of HMRC, coupled with the proposal to require software suppliers to agree to provide cut-down versions (which will lack full functionality) for free.

I think this proposal addresses the problem in the wrong way, and in a way that will cause considerable trouble for HMRC. My reasons for saying this are as follows.

1. In order to comply with their legal obligations, many businesses will have to spend money in addition to paying their tax. This is fundamentally wrong. You should be able to have all necessary dealings with the state at no additional cost. (Compare the fact that if you want to go to court without spending money on a lawyer, you can do so by representing yourself.)

2. The software companies will want to offer as little as possible in the free versions, while HMRC will want a reasonable amount to be offered. HMRC will get involved in tangled and wholly unnecessary negotiations, and there will inevitably be the suspicion of cosy deals being done - unjustified suspicion, perhaps, but there nonetheless. HMRC will also be at risk of litigation from rival software providers, when they are seen as having done deals with some providers that are more generous to the providers than the deals they have done with others.

3. The negotiations with providers will go on year after year, over which updates will be provided free of charge.

It would be far better if HMRC did not get into the business of doing deals, but instead did at least one, and perhaps both, of the following. (Of the two, I think the second one, provide a full package, would be the better one.)

A. Publish the interface and allow anyone to produce software

Publish the interface - the exact requirements for any file submitted to HMRC. Then anyone could produce software to match, and anyone could make it open-source if they wanted.

It is not clear how far HMRC already intend to go down this route. Paragraph
2.14 speaks of "developing and releasing new APIs". For this to be satisfactory, it must mean release in full to the public at large (and not just authorized suppliers), and in a form that allows anyone to try out software with them. On this last point, see the remarks by Toby Parkins in response to Q250 of the evidence that the Treasury Committee took on 06 September 2016, available here:

HMRC might object that they need to authorize the software for reasons of security of the HMRC system - they don't want people finding ways to feed false data into the system. While that is a legitimate concern, I very much doubt that the authorization of software would be the remedy. After all, people will find ways to spoof authorized software, and whatever security systems will be used with the authorized software (eg public and private keys) could be made a requirement of the software that anyone was allowed to develop.

Paragraph 2.18 also indicates that HMRC would undertake lots of testing of software, something which would require HMRC only to have to test a few packages. While that might be reassuring to taxpayers, it is unlikely to be necessary. If a product is a duff one, word will quickly spread. And it would be open to HMRC and others to provide sets of test data which people could put into software, and copies of the files which should come out at the other end for sending to HMRC. Consumer groups could then run the test data and compare the files which emerged with the files which should emerge, to see whether the software was any good.

B. Provide a full package free of charge

HMRC could provide their own full-featured package to do everything, including the keeping of accounting records that would feed into submissions to HMRC, free of charge (and preferably open-source so people could make their own modified versions it if they wished, or at least look at it in detail and propose amendments), and fully functional on all of Windows, Mac and Linux.

That approach would be far more likely to wean people off the shoebox-full-of-invoices system of record-keeping than asking taxpayers to spend money on commercial systems. And it would probably involve a good deal less effort for HMRC in total than entering into negotiations with commercial suppliers and testing all their various products.

HMRC's traditional argument against providing full-featured packages free of charge is that it would undermine the private sector software industry. Well, tough. It is not HMRC's job to create work that people then have to pay to get done. The concern in paragraph 2.22 that HMRC should provide reassurance to companies that they could provide both free and paid-for packages and still make money is wholly misplaced. Companies' profitability is not in principle HMRC's problem, and it is only made HMRC's problem if they first takes the decision to rely on commercial suppliers, rather than providing a full and free package.

Moreover, acting to keep commercial providers in business right against the idea of reducing regulatory burdens. And in the old, paper records, days, the Inland Revenue happily provided all the forms you needed, free of charge.

Finally, here is an admittedly off-the-wall suggestion. If HMRC do go down this route, it will be worth considering ways to get a package developed cheaply. It would make a fine project for computer science students - some to write the package, and others to find out what was wrong with it and propose corrections. Just look at what the open-source community has achieved, using collaboration tools like GitHub, and you will see that it really would not be that difficult. HMRC's main concern would probably be time discipline - the package would have to be ready by a certain date in order to fit in with broader plans. But it is not clear that such worries would be any greater than they would be with more traditional methods of software development that have been tried by Government agencies in the past.

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