Home Open Banking & Finance HMRC explores open banking’s potential to ‘streamline’ tax

HMRC explores open banking’s potential to ‘streamline’ tax

HMRC: the department wants to encourage the digitalisation of tax administration | Credit: Global Government Fintech

HM Revenue & Customs (HMRC) is investigating how it can use small businesses’ and self-employed individuals’ real-time financial transaction data, obtained through open banking and so with their permission, to calculate and collect tax.

The UK government department’s issuance of a request for information (RFI) on ‘tax-compliant banking products’ will be seen as the latest signal that the government is stepping up its interest in putting open banking to use for public service delivery.

Open banking involves the use of what are known as open application programming interfaces (APIs) to enable bank account holders to share their financial data with third parties. The UK is widely seen as a leading nation when it comes to rolling out open banking, with more than two million users using open banking-enabled products.

HMRC’s RFI notice is entitled ‘Tax-Compliant Banking Products Exploration and Proof of Concept’ and was issued last week.

The department is inviting suppliers, including fintech companies, ‘to contribute to building our knowledge regarding the possibility of using real-time transaction data in banking products for streamlined tax determination, automatic calculation and payment to HMRC, simplifying this process for taxpayers’. The focus is on small- and medium-sized enterprises (SMEs) and sole traders.

‘In the early stage of development’

Currently SMEs, sole traders and self-employed individuals are required to manually complete and submit a ‘self-assessment’ tax return each year, the RFI notes. The department says it wants to ‘fully understand the feasibility and potential uses of accessing real-time transaction data through open banking directly from business banking products and the application of automated tax determination, calculation and payment to HMRC’.

‘We plan to investigate what activity might be centralised to a bank account or banking application to simplify the process for tax-paying customers, and what related functionality, connectivity and regulation would be required by all involved parties for this to work,’ it explains.

More specifically, HMRC is looking to ascertain the feasibility of calculating and taking tax in real-time in or from business banking products, with tax payments flowing directly to HMRC; what activity can feasibly be centralised to banking products to support and simplify the preparation and calculation of income tax, value-added tax (VAT), corporation and taxes such as self-assessment tax for SMEs and the self-employed; and whether small businesses and sole traders would be in favour.

The RFI also wants respondents to consider how HMRC can ‘better leverage the PSD2 mandate to give open access to banking data in order to improve products and services available for sole traders and small businesses’. PSD2 is a reference to the European Union’s revised Payments Services Directive (PSD2), which paved the way for open banking.

HMRC’s notice says the department is ‘in the early stage of [concept] development and judging interest from potential suppliers’. The RFI is scheduled to close on 31 December.

Ongoing tax digitalisation effort

HMRC began to explore open banking in 2019, while existing schemes to encourage the digitalisation of tax administration include its high-profile ‘Making Tax Digital’ (MTD) initiative. This currently applies to VAT-registered businesses with a taxable turnover above the UK’s VAT threshold of £85,000 ($110,000), which are now required to keep digital records and use software to submit VAT returns, although VAT-registered businesses with a taxable turnover below £85,000 will be required to follow MTD rules from April 2022.

At present, third-party tax software products interact with HMRC systems through the department’s APIs. For now, though, while the software uses open banking APIs to access a customer’s bank account, it does not give HMRC access to a customer’s open banking data.

Nick Down, HMRC’s head of payments, told Global Government Fintech in July that various departments had been “working closely” with the UK’s Open Banking Implementation Entity (OBIE) through the Government Banking Service to “explore the potential strategic and practical benefits” of open banking. He said it was “still early days” for open banking but that “in time, we can see open banking solutions becoming the norm.”

Global Government Fintech also broke the news just over three months ago that the department had kicked off a £3m ($3.92m) tender for ‘Payment Initiation and Account Information Services’ – the UK’s first government tender specifically for open banking. The winner is yet to be announced.

‘Exciting opportunity’ for new technologies

In respect of the new RFI, an HMRC spokesperson told Global Government Fintech: “HMRC’s technical innovation team is exploring the concept of a tax-compliant bank account and is inviting fintechs and members of the financial industry to collaborate on a project to investigate the potential future use of real-time information in banking products to streamline tax processes. This is an exciting opportunity to test and understand how new technologies and industry developments might help us offer customers simpler, more automated, and increasingly effortless tax calculation, submission and payment services.”

OBIE’s head of ecosystem engagement, Simon Lyons, told Global Government Fintech: “OBIE recognises the potential for open banking to deliver benefits to government’s provision of services to citizens especially in the area of tax administration. HMRC equally recognises in its proof-of-concept document how some of its customer service objectives can be delivered through the protocols and technical capability that OBIE has delivered or has planned. This will also serve to deliver on ministers’ policy intentions to increase the overall capability of and competition in the UK’s banking and payment systems.”

Lyons added: “OBIE stands ready to help HMRC meet its objectives and to collaborate with them to ensure that any proof-of-concept that results from the exercise aligns with additional open banking solutions we are already in discussions with HMRC about.”

HMRC has ‘developing’ API capability

The department’s RFI links to a four-page backgrounder that explains that HMRC has developed the concept of a tax-compliant bank account and wants the private sector to ‘build intelligence and an understanding of the opportunities that existing and new technology innovation might present to make tax simpler for users in this way’.

Almost every individual and business in the UK is a direct customer of HMRC, the document explains, with the department collecting more than £500bn per year in revenue from more than 50 million customers.

‘HMRC’s principles of operating supports an API-first policy with cloud-based services,’ the document notes. The ‘cloud’ refers to remote servers hosted on the internet to store, manage and process data, rather than a ‘local’ server.

The document also refers to the government’s tax administration strategy, published in July, with its commitment to ‘introduce increasingly integrated processes, drawing on information from business systems and validated third parties’.

The backgrounder explains: ‘We want to test how the market might operate differently with greater use of open banking, PSD2, [payments messaging standard] ISO20022, other regulatory and compliance changes and the increased intermediation capability in the market. If we can couple HMRC’s developing API capability with greater provision of information, this may enable HMRC to make decisions on tax much quicker and better and, crucially, without our customers having to do anything else.’


Click here for Global Government Fintech’s dedicated topic section

Click here for Global Government Fintech’s interview with OBIE trustee Imran Gulamhuseinwala

Click here for Global Government Fintech’s review of global governments’ explorations of open banking’s potential for delivering citizen services

Click here for Global Government Fintech’s news story on HMRC’s tender for ‘Payment Initiation and Account Information Services’ – the UK’s first government tender specifically for open banking