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Covid-19 and tax digitalisation

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The OECD’s report, Tax and fiscal policy in response to the coronavirus crisis: strengthening confidence and resilience (15 April 2020), reveals that that 'tax will have a key role to play' both in terms of revenue and tax structure post Covid-19. It could see new steps taken, as in post-war scenarios, with the introduction of 'new sources of revenue' or the modification of 'the tax mix in existing systems'. The OECD suggests tax authorities may well invest in the digitalisation of their own systems to help spur revenue collection as 'highly digitalised tax administrations can increase compliance and reduce burdens on taxpayers'.

That’s always been a primary objective in the UK. Even before Covid-19, we heard Chancellor Rishi Sunak state in Budget 2020 that: 'The government is investing in additional compliance officers and new technology from HMRC… enabling HMRC to further reduce the tax gap'. Consequently, we can expect to see over 1300 additional compliance staff who, armed with more technological resources, will be brought in to close an additional £4.6bn of the tax gap over the next five years, every penny of which will be needed to help offset the spend on Covid-19.

HMRC plans to 'increase its investment in technology to better target those abusing the tax system, as reported in the Financial Times (15 April 2020), indicating that HMRC sees technological resource as fundamental in closing the tax gap. Its own investment in the 'making tax digital' (MTD) strategy mandating the adoption of tax technology has created a peculiar kind of arms race, with both regulator and corporation transforming together. The latest tax gap figures show that MTD for VAT alone was already forecast to deliver additional tax revenue of £1.2bn by 2023/24, with steady state savings of around £300m each year. 

So, if HMRC is armed with more resource and under mounting pressure to deliver further tax revenue, what does this mean for the corporate taxpayer?

Firstly, expect digitalisation to continue apace in the commercial and public sector. MTD is still very much on the government’s agenda and we can also expect HMRC to continue to invest in more sophisticated systems to enable it to detect and investigate potential instances of tax abuse or avoidance.

Secondly, there is likely to be zero tolerance towards non-compliance come 2021. Given that businesses have been granted extra time to comply with the digital links mandate under MTD (of a year or six months in the case of deferred businesses) we can expect HMRC to come down hard on those that fail to do so.

Finally, there will be tougher enforcement through penalties. Digital links compliance may well be assessed using behavioural parameters and the introduction of a new points-based penalty regime for VAT will enable HMRC to automatically award points and financial penalties. It will ensure penalties are awarded fairly and proportionately but also more effectively through the use of automated systems.

Andy Mills, commercial director, Tax Systems