When is the time right for real-time taxation?

Thanks to rapid growth in digital payments, the evolution to real-time reporting, and increased consumer willingness to share data in exchange for better service, the data to which agencies have access is surging in volume, veracity and velocity.

It’s a trend common to all industries. Here are a couple of examples. In financial services, challenged by new entrants to deliver much more responsive services, banks are introducing real-time fraud analysis along with improved customer certainty.

Meanwhile, to address manufacturing discrepancies in real time and dramatically reduce capital and operating costs in the pharmaceutical sector, companies are moving from manufacturing drugs in batches to continuous control of production.

Leaders in every industry are learning how to rapidly scale data and AI and are realising new opportunities to reinvent their businesses. The priority from here, whatever the sector? Unlocking value through better real-time decision-making powered by data.

Stepping into the new

Right now, it’s fair to say that although revenue agencies are on this journey, few are that far advanced. 

Many have greatly increased the data available to their existing processes, hoping to achieve insights that deliver better results – from refunds to collections to reporting. This is hugely helpful, of course. But it’s very much within the existing constructs of how tax is already administered.

If this is all that happens, a huge opportunity for data-led transformation is being missed. The size of the prize? Nothing short of transforming the way tax works. If agencies start to view their data trove through a different lens, they can begin asking a truly transformational question:

“How can we move forward from here, reinventing and adapting our processes around data so we can take full advantage of it and, in doing so, accelerate the drive to natural taxation – harnessing real-time data veracity so tax can be collected at the point (and time) a transaction arises?”

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Reinventing through natural taxation

Natural taxation imagines doing away with tax returns, ending businesses having to make regular withholding returns/payments, removing merchants from the sales tax process, and simplifying and streamlining the whole capital gains tax apparatus.

And now, thanks to unprecedented data availability, all of these goals can be within reach.

Let’s bring this to life. Right now, if you’re an employer looking to pay an employee a wage of £1,000, you actually pay them £500 because they’re in the 50% income tax bracket. The other £500 you pay to the revenue agency weeks or months later, often with an accompanying tax return.

This is an added administrative overhead and the delay in payment of the tax represents an increased compliance risk for the revenue agency.

Imagine if instead the employer paid the £1,000 and automatically, behind the scenes in real time, the system worked out how much tax is deducted and splits the payment, so £500 goes direct to the employee and the other £500 direct to the revenue agency.

That’s natural taxation (as envisaged by OECD Tax 3.0) in operation. It’s a concept that encompasses reporting and payments. And applied to the latter it’s a way to reinvent how taxation happens through disengagement.

The benefits? Tax payments that are seamless, rapid, accurate and much, much more efficient to administer. Compliance is designed into the process.

The same kind of withholding tax approach can also be applied to VAT (although it’s more complex to do so), and to various capital taxes. It’s harder to apply to income taxes that are less event driven, such as corporation taxation.

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Futuristic, but within reach

This is the type of transformation that’s in scope. All about disengagement, it’s currently still quite futuristic, but not to an extraordinary degree by any means. One example? Following a call for evidence a few years back, HMRC recently issued a request for information on VAT split payments – splitting off VAT for payments to non-UK, non-compliant online sellers before those payments leave the country.

We worked with a payments service provider (PSP) to come up with a response and basically the answer was that this indeed appeared to be feasible. It’s analogous to what PSPs already do with food delivery where each payment gets split automatically, when it’s made, between driver, digital platform, and restaurant.

We know that, right now, revenue agencies are struggling to take this kind of data-led transformation forward. Most are still taking the traditional approach. That means their goal is to gather as much data as possible and use it to optimise existing collections and audit processes.

In doing so, their data-driven activities tend to focus on tackling non-compliance after the taxation event. This approach is inherently inefficient both in terms of the effort required to address individual non-compliance and the reality that the limited number of revenue auditors will always mean some fish slip through the net.

Bigger rewards may come when agencies get to compliance by design-type outcomes. In other words, rather than expending resources on discovering non-compliant individuals, the emphasis would instead be on using natural taxation to help to limit the number of scenarios where people have the opportunity to be non-compliant.

Show me the value

Changes like this are big, and not just from a technology point of view. There are major regulatory and policy implications too. That’s why a robust business case is so essential.

If they’re going to succeed, agencies have to be able to measure the benefits they’ll be creating. Bottom line? Successful data-led transformation hinges on measuring something new.

It’s not enough to focus on, for example, yield per audit or the effectiveness of a collection process. The real effort needs to go into how much tax is being collected overall and how much is slipping away.

I’d love to hear your views on this blog. So please get in touch. Meanwhile, thanks for reading.