Taxing times: SMEs cautious about open banking

By on 14/01/2021
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 exploring how technology can streamline tax administration. But HMRC must not add more burden to a community that is already being battered by COVID-19 and Brexit. Ian Hall reports

In December last year, HM Revenue & Customs (HMRC) issued a request for information (RFI) to investigate how it can use SMEs’ and sole traders’ real-time financial transaction data, obtained through open banking and therefore with their permission, to calculate and collect tax.

Open banking uses open application programming interfaces (APIs) to enable bank account holders to share their financial data with third parties. HMRC wants to understand more about “the possibility of using real-time transaction data in banking products for streamlined tax determination, automatic calculation and payment”.

The focus is on SMEs and sole traders, who currently must manually complete and submit a self-assessment tax return each year – the hope being that this could be streamlined. But the SME community remains sceptical about sharing data and tough economic headwinds, caused by COVID-19 and Brexit, remain their priority.

The bigger picture

This latest RFI, which closed at the end of December 2020, is part of a wider move to encourage the digitalisation of tax administration, including the government’s Making Tax Digital (MTD) initiative. This currently applies to VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000 ($114,000), which are now required to keep digital records and use software to submit VAT returns. Registered businesses with a taxable turnover below £85,000 will be required to follow MTD rules from April next year.

Last summer Nick Down, HMRC’s head of payments, said that 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 – 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.”

Barriers to deployment?

While automated tax payments sound attractive, says Andy Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed, a membership association, he questions whether it will reduce bureaucracy. “For many businesses, fluctuating incomes over the year make calculating tax liability in real-time more challenging,” he says.

“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 adds.

Cost and trust are two further barriers to deploying open banking for HMRC’s stated purpose, according to Martin McTague, national policy and advocacy vice chair at the UK’s Federation of Small Businesses (FSB), a campaigning group.

“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,” he says.

There are also concerns in the SME community about sharing data. “We found last year that only 15% 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,” adds McTague.

Accountants need convincing

Phil Hall, head of public affairs and public policy at the Association of Accounting Technicians professional body, agrees. Open banking could be helpful to reduce bureaucracy and administration, but “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,” he says.

“That’s where accountants could help – both in highlighting the benefits but also in taking small businesses through the process,” he adds. “Ultimately, anything that makes tax reporting easier for small businesses would be welcomed by both the SME community and their accountants.”

While acknowledging benefits, Jason Piper, head of taxation at global professional body the Association of Chartered Certified Accountants, is not convinced that developing APIs to access open banking data is the best use of HMRC’s resources. “The benefits would not be universal, so the return on investment would be diluted,” he says. “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.”

OBIE: 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 argues, 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 also suggests that perceptions in the SME community are changing. In December last year, the OBIE and Ipsos Mori published results from a survey of 500 SMEs. Some 50% of respondents said they were using more “services offered by open banking providers” during the COVID-19 pandemic to “future-proof” operations. Indeed, more than 2.5 million UK consumers and businesses now use open banking-enabled products to manage their finances, access credit and make payments, according to figures released by the OBIE yesterday.

“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,” says Lyons.

“We predict that we will start to see a snowball effect within the technology itself as more complex offerings are introduced,” Lyons adds. “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.”

Challenges remain

At the moment, government is still just exploring the potential of open banking. At the time the RFI was released, an HMRC spokesperson said they 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”. They noted, however, that “there are still a number of challenges to overcome”.

The economic context will continue to frame developments. The UK will lose at least 250,000 small businesses this year, the FSB warned. It says that government support measures have failed to keep pace with intensifying lockdown restrictions.

 “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,” says the FSB’s McTague.

But, he adds, concerns about open banking need to be addressed among SMEs “because, deployed in the right way, it will undoubtedly be a force for good across a number of areas, not least access to finance.”

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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