HMRC explores the potential of open banking to ‘streamline’ tax

By on 16/12/2020
HMRC: the department wants to encourage the digitalisation of tax administration | Credit: Global Government Fintech

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

The department issued a request for information (RFI) on “tax-compliant banking products” last week. This is the latest signal that the government is stepping up its interest in using open banking to deliver public services.

Open banking enables account holders to share financial data with third parties using APIs. The UK is widely seen as a leading nation when it comes to rolling out open banking, with more than two million people using such products.

HMRC 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), sole traders and self-employed: currently, they have to manually submit a self-assessment tax return each year, the RFI notes.

“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,” a spokesperson from HMRC said.

The scope of the project

HMRC’s notice says the department is “in the early stage of development and judging interest from potential suppliers”.

“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,” the RFI explains.

More specifically, HMRC is looking to ascertain the feasibility of calculating and taking tax in real-time using business banking products, with payments flowing directly to HMRC. It also wants to explore what activity can be centralised to banking products to support and simplify the preparation and calculation of taxes including income tax, value-added tax (VAT), corporation tax and self-assessment taxes for SMEs and the self-employed. Alongside this, HMRC wants to understand whether small businesses and sole traders would be in favour of the move.

The RFI, which is scheduled to close on 31 December 2020, also wants respondents to consider the European Union’s revised Payments Services Directive (PSD2), which paved the way for open banking. HMRC wants to explore how it can “better leverage the PSD2 mandate to give open access to banking data in order to improve products and services available for the sole trader and small businesses”.

Simon Lyons, head of ecosystem engagement at the UK’s Open Banking Implementation Entity (OBIE), which sets the software standards and governance structures enabling the implementation of open banking, said: “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.”

He 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.”

Ongoing tax digitalisation effort

HMRC began to explore open banking in 2019. It is already promoting the digitalisation of tax administration, for example through schemes such as the Making Tax Digital (MTD) initiative. Under the programme, VAT-registered businesses with a taxable turnover above the threshold of £85,000 (US$110,000) are now required to keep digital records and use software to submit VAT returns. This will roll out to VAT-registered businesses with a taxable turnover below the threshold 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.

This summer, Nick Down, HMRC’s head of payments, said that various departments had been “working closely” with the OBIE 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.”

In August, HMRC 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.

HMRC’s ‘developing’ API capability

HMRC has developed the concept of a tax-compliant bank account, according to a document it attached to the RFI. Now it wants an “industry view” on 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, it says, with the department collecting billions every year from more than 50 million customers.

“HMRC’s principles of operating supports an API-first policy with cloud-based services,” the document notes.

“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,” it adds.

A version of this story was originally published by our sister title Global Government Fintech.

About Ian Hall

Ian is editor of Global Government Fintech a sister publication to Global Government Forum. Ian also writes for media including City AM and #DisruptionBanking. He is former UK director for the pan-European media network Euractiv (2011-2018), editor of Public Affairs News (2007-2011) and news editor of PR Week (2000-2007). He was shortlisted for ‘Editor of the Year’ at the British Society of Magazine Editors (BSME) Awards in 2010. He began his career in Bulgaria at English-language weekly the Sofia Echo. Ian has an MA in Urban and Regional Change in Europe and a BA in Economics, both from Durham University.

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