Home Open Banking & Finance Taxing times: HMRC delves deeper into open banking

Taxing times: HMRC delves deeper into open banking

Tax: the UK government is looking at using SMEs’ and self-employed individuals’ real-time financial transaction data to calculate and collect tax | Credit: Steve Buissinne; Pixabay

The UK government is investigating open banking’s potential to ‘streamline’ tax payments for small businesses. Ian Hall explains and explores what’s planned

This week kicked off with grim data from British business: battered by the pandemic, a record number of small-business owners expect to close down during the year ahead.

The country is on track to lose more than a quarter of a million businesses, the UK’s Federation of Small Businesses (FSB) warned, saying that the development of government support measures has failed to keep pace with intensifying lockdown restrictions.

But, beyond the almighty shadow of coronavirus, perhaps there’s a glimmer of light that – on the administrative side of their operations – a technology-led solution being considered by government has the potential to make life a little easier in the years to come for small- and medium-sized businesses (SMEs), as well as the self-employed, when it comes to dealings with the taxman.

As reported by Global Government Fintech in the run-up to Christmas, HM Revenue & Customs (HMRC) is investigating how it can use SMEs’ and self-employed individuals’ real-time financial transaction data, obtained through open banking and so with their permission, to calculate and collect their tax.

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. Nick Down, HMRC’s head of payments, told us six months ago that various departments had been “working closely” with the UK’s Open Banking Implementation Entity (OBIE) – which sets the software standards and governance structures enabling open banking’s implementation – through the Government Banking Service to “explore the potential strategic and practical benefits” of open banking. He said it was “still early days” but that “in time, we can see open banking solutions becoming the norm.”

HMRC’s pre-Yuletide request for information (RFI), entitled ‘Tax-Compliant Banking Products Exploration and Proof of Concept’, is one of the earliest manifestations of steps being taken on Down’s pathway to norm.

Objective: streamlining and simplification

In its RFI the department invited 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 SMEs and sole traders, who – at present – are required to manually complete and submit a ‘self-assessment’ tax return each year, the RFI noted. The department said 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’ (see our news story for further background).

Although the RFI (which closed on 31 December) sees HMRC exploring new territory, 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 ($114,000), which are now required to keep digital records and use software to submit VAT returns (VAT-registered businesses with a taxable turnover below £85,000 will be required to follow MTD rules from April next year).

It is interesting to note that the Office of Tax Simplification, which advises the government on simplifying the UK tax system, also put out a statement just before Christmas in relation to personal tax and third-party data, saying that it will ‘publish a call for evidence shortly’.

At present, for HMRC, third-party tax software products interact with HMRC systems through the department’s APIs. 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. But, as the RPI shows, change could be afoot.

Barriers to deployment?

Martin McTague

What do small businesses, sole traders and accountants think? Martin McTague, national policy and advocacy vice-chair at the FSB, which describes itself as the UK’s largest grassroots business campaigning group, welcomes any efforts to streamline tax compliance, but sees two standout barriers to deploying open banking for HMRC’s stated purpose.

“The first is cost,” he says. “We were promised that there would be a route through which small firms could make MTD submissions free of charge but it never manifested. When surveyed, small VAT-registered firms put the year one cost of compliance at more than £500 [about $670] on average, with that cost rising significantly for bigger SMEs. Innovation is important, but it can’t be the business community footing the bill for it all the time.

“The second is trust. We found last year that only 15 per cent of small firms were sharing banking information electronically to help aid productivity – two-thirds said they wouldn’t consider doing so, primarily because of fears about safety.”

Andy Chamberlain

Andy Chamberlain is director of policy at IPSE (Association of Independent Professionals and the Self-Employed), whose recent focus has included lobbying for what it describes as a ‘focused, flexible and fair’ approach to Covid-related government support.

“It is absolutely right that government works with the private sector to develop technology that would simplify tax administration for the UK’s smallest businesses,” Chamberlain tells Global Government Fintech. “Automated tax payments sound attractive as it suggests the annual tax return – a cause of considerable cost and burden to businesses – would no longer be required. For many businesses though, fluctuating incomes over the year would make calculating tax liability in real time more challenging. Seasonal businesses in particular might struggle and would probably still need to submit an annual return to ensure that tax hadn’t been under or overpaid,” he says.

Accountants: need convincing

Jason Piper

It is also interesting to hear what the accountancy profession thinks of HMRC’s plans.

“Open banking undoubtedly holds promise as a way to improve the tax compliance process, but I am not convinced it is the best use of resources for HMRC to develop APIs to access open banking data itself,” Jason Piper, head of taxation at ACCA (Association of Chartered Certified Accountants), says.

“The benefits would not be universal, so the return on investment would be diluted. There are definitely other things that HMRC could do which might benefit more taxpayers, starting with simplifying the legal framework, so that it’s easier to write software tools to interact with the open banking data.”

Phil Hall

A further perspective if provided by Phil Hall, head of public affairs and public policy at AAT (Association of Accounting Technicians), a London-based professional body with about 140,000 members worldwide. Its 4,250 AAT-licensed accountants provide tax and accountancy services exclusively to more than half a million British SMEs.

“Further progressing open banking to deal with tax issues could be helpful in reducing bureaucracy and administration, freeing up small business owners to get on with the day-to-day nuts and bolts of running their business,” reflects Hall. “However, there’s a real job to do in convincing SMEs of such benefits given so many appear resistant to sharing their data with third parties. That’s where accountants could help – both in highlighting the benefits but also in taking small businesses through the process. Ultimately, anything that makes tax reporting easier for small businesses would be welcomed by both the SME community and their accountants.”

OBIE: ‘wave of change is coming’

OBIE’s head of ecosystem engagement, Simon Lyons, believes that open banking technology will allow the government, particularly HMRC, “to engage with their clients in a much more effective and economic way”. In fact, he makes the point that the department’s move towards appointing a specific supplier for open banking payments and data “proves that open banking’s value is being recognised and embraced” by government.

Research by the consultancy KPMG just over two years ago concluded that while some SMEs are receptive to open banking, ‘much work is to be done’ to win over the sector. That said, OBIE last month published research by Ipsos MORI that found growing use of ‘services offered by open banking providers’ during the pandemic among 500 SMEs polled. Lyons says the OBIE-commissioned research demonstrates that the small business community is “beginning to become more familiar with the technology and embracing its offerings”. OBIE today (13 January) announced that more than 2.5 million UK consumers and businesses now use open banking-enabled products to manage their finances, access credit and make payments.

“More than 50 per cent of UK SMEs are now using open banking providers, and our small-business research appears to indicate that a wave of change is coming, with traditionally loyal SMEs now shopping around to ensure that their financial provider is giving them the best deal. As uptake increases, so do the possibilities,” Lyons says. Hence, HMRC’s recent RFI.

“We predict that we will start to see a snowball effect within the technology itself as more complex offerings are introduced,” Lyons continues. “For example, the simplest use cases of provisioning statement data will grow to open banking-driven fiscal payments and potentially even a tax-compliant bank account that will help an SME calculate their obligations at the time of transaction.”

‘Number of challenges to overcome’

‘Potential’ resonates as the key word, as it does – in this specific case of tax-compliant bank accounts – when the government explains its aspirations.

“HMRC believes open banking has the potential to deliver benefits to government’s provision of services to its citizens, especially in the area of tax administration,” an HMRC spokesperson says.Through our Proof of Concept we are looking to further explore how some of our customer service objectives can be delivered through the protocols and technical capability that open banking has either delivered or has planned. However, we recognise there are still a number of challenges to overcome and will seek to work closely with industry and accountancy bodies to address concerns.”

Ultimately, the unprecedented economic context will continue to frame developments. “We have to address concerns about open banking within the small business community because, deployed in the right way, it will undoubtedly be a force for good across a number of areas, not least access to finance,” concludes the FSB’s McTague.

“That said, with Covid-linked disruption ongoing and Britain’s transition to a new relationship with the European Union still in process, the government’s focus over the next few years needs to be on alleviating operating costs and spurring growth, not on enforcement of a tax burden that has grown significantly over the past decade.”

Momentum will likely continue to build for this. But assuming HMRC proceeds with implementation, the challenge will be winning buy-in from those who (open banking’s advocates believe) stand to benefit.


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