In RSM’s Weekly Tax Brief dated 22nd December 2015, I looked at the tax consequences of an error which had been exposed in an online form provided by the Ministry of Justice for use in connection with divorces.
Sadly, but perhaps not surprisingly, this is not an isolated example of the problem. For example, recent errors in HMRC’s income tax self-assessment software meant that a number of clients overpaid tax which we subsequently had to reclaim from HMRC on their behalf:
- When a return is e-filed, HMRC compares the tax figure computed using commercial software to the one its software has calculated. If the figures do not agree, HMRC will not accept the submission.
- In 2013/14 commercial software correctly performed the calculations in a complex area of tax law. HMRC’s computers refused to accept the returns. We were advised that the calculations were wrong and had to edit the returns to show the higher figure before HMRC would accept the returns.
- For 2014/15 we were confused to find that HMRC was now accepting returns prepared on the basis which had previously been rejected. It became apparent that HMRC had discovered it was wrong and corrected its computation, but had not told us.
- This meant that a number of clients had overpaid 2013/14 tax because they had followed HMRC’s rules. We are now claiming back thousands of pounds of overpaid tax on behalf of those clients.
So far as we understand it, all independent software providers suffered the same problem because they are required to comply with a standard set by HMRC to submit a self-assessment tax return. If the standard set by HMRC is incorrect, all tax returns software will be wrong in that respect. This suggests a fundamental gap in the quality control of the publication of online forms by the Ministry of Justice, by HMRC and potentially by other government departments. This is a matter which requires attention now as citizens are increasingly required to complete online forms because no other means of 'interaction' with 'government service providers' is permitted.
At the very least, it should be possible to file a computation on line, even if does not accord with HMRC’s software. HMRC would lose nothing because, if the tax figure was subsequently found to be wrong, interest would be recoverable from the taxpayer.
So far, ad hoc work-arounds have been used. In the situation I have described above, the HMRC technical department eventually admitted the error and corrected its own software. As will readily be seen, where the error applies for more than one period, the earlier periods will have to be corrected by a resubmission or manual adjustment of the return. If the taxpayer does not know about the error in the tax calculation, he or she can’t make the correction.
This takes us to the heart of the problem. HMRC sets the standards with which tax return software must comply. Even if HMRC is wrong and the commercial software is correct, the tax return will not be accepted as a valid online submission by the HMRC computer.
With HMRC driving the introduction of:
- online digital accounts,
- a form of 'real time information' for the self-employed, and
- accelerated payment of income tax and capital gains taxes by many,
it is absolutely essential that everybody can trust the software behind the tax calculations.
We therefore add our voice to calls for an independent body to check the logic in online forms produced by all government departments to ensure that it is correct and in line with the law. All citizens, and the commercial software companies who are so important in helping citizens discharge their digital duties to the State, can then have confidence that they are working on firm foundations.
HMRC are pushing responsibility for the digital strategy onto the software houses. These include a diverse range of new entrants. While HMRC will have some software responsibility, there is a major shift in balance here.