HMRC’s digital woes – time to press the panic button?

05 April 2017

Three critical HMRC digital projects are running into problems. The obvious solution is to increase HMRC’s budgets, and to ensure that it has plenty of skilled, experienced IT experts. Unfortunately, precisely the reverse is happening. We review the implications.

The year began badly with the Treasury Select Committee (TSC) identifying major shortcomings in HMRC’s flagship Making Tax Digital project. Although the TSC urged the government to change its approach, many felt that the Chancellor’s Budget day concessions were too few in number and too limited in extent. It’s also emerged that, in the first few years of MTD, small businesses will face only additional costs, with no prospect of efficiency savings. Furthermore, notwithstanding HMRC’s use of its COSAIN system to identify tax evaders, and the hope that the MTD project would help curb tax evasion, there are continuing doubts over HMRC’s willingness to use tech solutions to tackle tax evasion. My colleague Mike Down looks into the OECD report on this.

Then in March it emerged that HMRC’s work on the new Customs Declaration System, which will be absolutely crucial to the UK economy after Britain leaves the EU, is slipping badly. To put this in context, HMRC currently handles 60 million customs declarations each year. Once the UK is outside the customs union, the figure is expected to soar to 300 million. The TSC is now investigating the issue urgently, alarmed that the project has been downgraded from a green traffic light rating to red-amber. My colleague David Wilson delves into the detail later in this tax brief.

So one major new project (MTD) is running into problems while a Brexit-critical upgrade (the Customs Declaration System) seems to be foundering.

As if that wasn’t enough, there are doubts about HMRC’s tax return filing software for 2016/17. In weekly tax brief we’ve previously voiced concerns that the complex range of tax reliefs and restrictions, allowances and rate bands, might overwhelm the software. We are saddened to hear that our fears seem to have been justified. Because of shortcomings in the specification given by HMRC to software designers, HMRC’s tax return software will calculate the wrong liability for some people. And guess what – the errors will generally be in HMRC’s favour. Unless HMRC corrects the problem, affected individuals will have to file their tax returns in paper format by 31 October 2017 instead of digitally by 31 January 2018.

What can be done about this? Two immediate suggestions are desperately obvious. 

First, give HMRC more money to do its job properly. Perversely, far from being increased, HMRC’s annual budget is being reduced from £3.6 billion in 2016/17 to £2.9 billion in 2019/20.

Second, ensure that HMRC has sufficient, experienced IT experts to deliver these projects. And here’s the rub. Because of HMRC’s approach to IR35, it’s reported that HMRC is about to tax contractors who use personal service companies as if they were permanent employees of HMRC. And guess what? The very IT experts on whom HMRC relies are quitting rather than take a cut in their after-tax pay.

As they say, you couldn’t make it up.

For more information please get in touch with George Bull, or your usual RSM contact.