How Tax Agencies can Outmanoeuvre the Uncertainty

In recent weeks, a lot has been said and written about the impacts of COVID-19 on government revenues and national tax agencies. Much of the debate has focused on the immediate pressures confronting them amid the crisis – including the sudden drop in tax income, and the surge in demand from businesses and citizens for support services – and on the rapid and decisive measures they’ve taken in responses.

But with the first signs of an easing of the coronavirus restrictions emerging in some countries, I think now is the time to consider the longer-term implications. In my view, the COVID-19 pandemic will play out for revenue agencies in three distinct phases.

The initial stage – now drawing to a close – is the immediate crisis response. During this phase, agencies have been taking action to ensure critical operations can continue – such as activating work-from-home procedures – while also flexing their decision-making to help taxpayers get through the crisis. They’ve also been implementing emergency changes to legislation and policy at high speed.

These changes have been substantial and sweeping. Nearly all countries worldwide have deferred filing and payment of taxes, and active collections compliance activities have largely ceased. Changes to corporate taxes have varied widely, with – for example – Norway allowing losses to be offset against the previous year’s profit, and Italy granting tax credits equal to 60% of rent for March. Property taxes have also been in scope, with the UK giving exposed small companies a holiday on up to 100% of their business rates liability. And countries including Spain, France, Portugal and Norway have closed all public tax offices.

The opening phase, characterised by emergency responses like these, is now giving way to the second time-horizon: the transition to pandemic operations. This is the period when agencies will effectively be dealing with the reality of the various emergency measures introduced during the crisis response. It’s likely to last several months – and it’s this stage that I would like to concentrate on in this blog post.

New challenges – and three types of backlog
It’s already clear that this second phase will raise quite different challenges from the first. For example, many observers have highlighted the case backlog that revenue agencies will face as they seek to return to more ‘normal’ operations. But in fact this backlog will fall into three distinct types.

The first will be a backlog of regular monthly tasks that agencies routinely carry out anyway, but which have been slowed or delayed by the crisis. Coronavirus-related disruptions such as the shift to home-working and introduction of emergency measures will have impacted productivity, contributing to this first backlog.

The second backlog will consist of additional cases triggered by the new measures. These cases will include people asking for decisions on things like payment plans and deferred VAT liabilities.

The third backlog will be made up of cases that were treated in an emergency manner during the crisis response. These cases will need to be revisited, and the decisions made on them reconsidered.

Together, these three backlogs amount to a significant volume of work that will need to be handled during the “pandemic operations phase”, as agencies try to get back to normal while dealing with the continuing fallout from COVID-19 related measures.

For example, consider how the deadline extensions introduced for tax filings reduce the time agencies have to run filing processes, while also adding additional steps to address new exceptions. Or how postponement of tax payments creates an urgent need for new customer facilities, such as an online service where taxpayers can stop, start or defer payments without fear of non-compliance.

From enforcing compliance to providing support
Additionally, every element of a tax agency’s expanded workload will need to be handled in a different way. Traditionally, agencies’ core focus has been on enforcing compliance in order to maximise the government tax take.

However, with many formerly viable companies struggling to stay afloat, a narrow enforcement mandate is no longer appropriate. Instead, agencies will need to support businesses that may be on the brink of bankruptcy, and help them find a way to survive – often against tight timelines.

This shift brings significant implications for agencies’ organisational culture. But it also has other effects. One is a need to prioritise backlogs in a different way, perhaps focusing on cases where speed is vital if a collapse is to be avoided. Another is that agencies have less ability to use their full range of collection tools. such as imposing interest and penalties on non- or late-payers. Yet while tax agencies must take a more supportive approach, they also have to ensure they maintain the flow of government revenues.

All of these challenges will arise in the coming months, during the second phase of agencies’ COVID-19 response – the transition to the new normal. Once that’s complete, they’ll enter stage three: the long-term effect. This more extended time-horizon will involve ongoing adoption and adjustment, with agencies making growing use of automation to deliver policy change faster and improve their operational flexibility.

We’re already assisting some agencies in preparing for stage two. Examples include helping various agencies in Europe prepare for pandemic operations. Stage three is still some way off – but it’s already on the radar of think-tanks such as IOTA and the OECD.

Given the wide array of emergency measures taken by governments worldwide, it’s clear that the move to pandemic operations and then longer-term adjustment will play out differently for revenue agencies in different countries. But they all face one overarching question: how far – and for how long – will they shift the balance from enforcement to support? On that point, the jury’s still out. And will be for some time.