ICAS submission to Lord Carter of Coles on the review of HM Revenue & Customs online services

Lord Carter of Coles

3rd Floor

Victoria House

Bloomsbury Square

LONDON

WC1B 4SE

29 August 2005

Dear Sir

Review of H M Revenue & Customs’ Online Services

Thank you for your letter of 1 August inviting The Institute of Chartered Accountants of Scotland (ICAS) to express its views as a key stakeholder in your review of H M Revenue & Customs’ online services.   We welcome this opportunity.

Introduction to ICAS

The Institute of Chartered Accountants of Scotland is the world's first professional body of accountants, receiving its Royal Charter in 1854.    ICAS has over 16,000 members worldwide and in the UK the CA designation is reserved exclusively for their use.

Under the Royal Charter, ICAS works in the public interest.    Its objective is to uphold the integrity and standing of the profession of chartered accountancy in the interests of society and the membership, through excellence in education and the development of accountancy and through service to members and the enforcement of professional standards.

Under the Royal Charter, ICAS works in the public interest.    Its objective is to uphold the integrity and standing of the profession of chartered accountancy in the interests of society and the membership, through excellence in education and the development of accountancy and through service to members and the enforcement of professional standards.

Introduction to our views on HMRC’s online services

We note that the terms of reference of your review include advising Ministers on measures to further increase the use of HMRC’s key online services, in order to realise benefits for HMRC’s customers and to ensure sustainable and efficient service delivery, whilst continuing to support compliance.

We strongly support the view expressed in your Review of Payroll Services in September 2001 that the way forward was to take advantage of the opportunities provided by IT.   We believe that this is still as

apt today as it was then.   However we have grave reservations about the way in which such opportunities have been pursued to date, and about the damage done by mistakes which have been made.

We believe HMRC’s electronic services strategy to be fundamental to the efficient administration of taxes in future.   However, we see little evidence of any coherent overall strategy in the development of HMRC e-services to date.   What little evidence there is suggests that HMRC has looked wholly at its own requirements and failed to take the needs of other stakeholders into account in determining its plans.

There is a need to restore the faith of potential users in the concept of e-filing, and to overcome HMRC’s loss of credibility following the virtual collapse of its IT systems for tax credits, personal tax returns, stamp duty land tax and payroll.   Successful implementation of an e-services strategy will require HMRC and the tax profession to work together towards the same ends in an open and trusting relationship.   This requires a step change in the attitudes of Government Ministers and HMRC, whose concentration on the current purge of tax planning activities of a small minority of advisers may be inclined to obscure the substantial benefits which the work of professional intermediaries brings to the operation of the tax system.

Recent surveys of the views of our members have revealed widespread enthusiasm for electronic working, in spite of a very large number of complaints about HMRC’s existing e-services.   Our members continue to express strong support for the improvement of HMRC’s existing e-services and their subsequent expansion.

Against this background, we are disappointed to note that the Government has allowed you so little time (and much of it during the summer holiday period) to obtain input on this important subject.   We believe that the issues involved are of fundamental importance and that much greater time should be allowed for thorough consultation.

What has gone wrong – Project management and change management issues

Many IT projects initiated to date by HMRC have had worthy objectives, and have been addressed with impressive commitment by the HMRC teams involved.   However, it appears to us that benefits which might have been expected have failed to materialise owing to fundamental flaws in HMRC’s approach.   Notable departures from generally accepted best practice in the management of IT developments and the management of business change have destroyed the credibility and effectiveness of projects and deprived them of the success which they deserved.

The following are examples of significant flaws that we have observed:

1.         

In many HMRC IT projects to date there seems to have been inadequate regard for management of key project elements, including matters as fundamental as identifying the needs of potential users and managing their expectations, addressing the process of change likely to be experienced by those users, and meeting the demands of users and the expected capacity requirements of the systems.   New systems have been implemented without adequate testing and have failed to achieve what had been expected of them.

2.         

Virtually all HMRC IT systems seem designed to meet the needs of HMRC alone.   In the few instances where we can identify any process undertaken to identify the real needs of potential users among the taxpayer and agent community, this seems to be characterised by HMRC itself identifying what it believes those requirements to be, rather than seeking to do so through active participation of representatives of the potential users.   This contrasts with many large scale private sector IT projects, where successful management of change is typically achieved by identifying the needs of potential users, putting those needs foremost, and designing the systems to meet them.

3.         

We are aware of insistence by HMRC on changing the project team at the point a new system goes ‘live’, apparently to maintain security and confidentiality of taxpayer data.   This would appear to come at a high cost, since the change in project ownership frustrates effective user support, removes the opportunity for any effective post-implementation review, and makes it almost inevitable that HMRC does not learn from its mistakes.

4.         

There has been no public accountability with regard to periodic gateway reviews, which should be designed to demonstrate that all project assumptions have been tested and that each project is on track to meet its objectives.   Publication of these reviews timeously and in detail might develop confidence in future systems among potential users – a factor which is so sadly lacking at the moment.

What has gone wrong – Detail

We do not propose to include an exhaustive review of all that has gone wrong to date, which is on record elsewhere.   We would prefer to mention a few salient points that appear to have contributed to those failures, as follows:

Tax Credits:

·           

Failure to consider the information needs of claimants wishing to check their tax credits awards.

·           

Failure to anticipate capacity demands.

ITSA e-filing:

·           

Failure to anticipate capacity demands.

·           

Failure to anticipate the needs of users to submit accompanying accounts, computations and other documents.

CTSA e-filing:

·           

Failure to take account of the already substantial market dominance of third party software.

Payroll e-filing:

·           

Failure to impose a realistic timescale for adequate system testing and user testing.

·           

Failure to anticipate capacity demands, particularly where those demands had been increased by Government incentives.

SDLT e-filing:

·           

Failure to impose a realistic timescale for system testing and user testing.

·           

Loss of credibility caused by last-minute cancellation of planned system launch.

ESSU’s Form 42:

·           

Inexplicable failure to consider an e-filing facility for this onerous reporting requirement.

·           

Publication of Form 42 online in an unfriendly format.

Communications with HMRC:

·           

For taxpayers and agents, loss of accessibility to HMRC caseworkers as a result of the imposition of call centres.

·           

For taxpayers and agents, lack of email as an available medium for day-to-day communication with HMRC on case management.

Experience elsewhere

The short timescale allowed us for representations to you does not give us an adequate opportunity to explore the lessons that the UK might learn from other countries where fiscal e-services are already more fully developed than here.   We hope that your review will draw on the experience of such countries – including the USA , Canada , Australia , Japan , Norway , the Netherlands and Estonia .

For example, the successful introduction of a number of e-services by the tax authorities in the Netherlands suggests that their obvious success to date is explained at least partly by their reliance on a number factors that are absent from the UK.   These include:

(i)

Development of personal tax e-filing software of the highest quality made available to all taxpayers free of charge has supported and encouraged voluntary e‑filing.   The software is user-friendly, helps the user to ensure that inputs are not overlooked, computes the tax liability immediately, calculates the effect of statutory options, and optimises the result.   Returns submitted electronically are processed swiftly, and tax repayments issued or tax liabilities confirmed within a few weeks.   As a result, we understand that some 80% to 90% of all personal tax returns are now e-filed voluntarily.   The approach adopted provides the tax authorities and taxpayers alike with substantial benefits from e-filing, without the need to impose mandatory e-filing that would disadvantage the elderly and various other groups in the community.   Further benefits are expected;   pre‑population of personal tax returns with information from employers and third parties should become the norm within about two years from now.

(ii)

Strategic working together by the tax authorities, the tax profession and the software industry on corporate tax e-filing has led to the development of a number of high quality third party software solutions available to the tax agent community and to those companies wishing to do their own e-filing.   The marketing and implementation of these e-filing solutions has been pursued jointly by the tax authorities, the professional institutes and the software vendors, who have together created strong public confidence in e-filing.

What needs to change – Recommendations

We recommend that the following features should be adopted by HMRC:

(a)

There should be genuine ongoing consultation by HMRC with the tax profession and representatives of taxpayers in determining HMRC’s e-services strategy.   This should include the establishment of a strategic alliance between HMRC and the taxpayer and agent community, to determine the direction of HMRC e‑services development and to agree on the priorities and timescales appropriate to encourage success.

(b)

Within the framework of an agreed strategy, HMRC, the tax profession and software vendors should work together in designing and implementing e-service solutions.

(c)

Recognised best practice should be followed in the management of all HMRC IT projects.   To this end, representatives of the taxpayer and agent community should be involved actively in key stages of each HMRC IT project, including requirement specification, gateway reviews, user testing, implementation planning and post-implementation reviews.

(d)

In accordance with the principles of open government, all gateway reviews and post-implementation reviews on HMRC IT projects should be published as soon as they have been carried out.

(e)

In consultation with the tax profession, HMRC should adopt and adhere to minimum standards for e-features and e-processes to be incorporated across all HMRC divisions and functions, so that all external users (taxpayers and agents) will find a consistency of approach in the availability and effectiveness of e‑services.   (This might include, for example, minimum standards for email access, web-based information and guidance, maintenance of standing data, online notification facilities for all claims and elections, support for paperless operations etc.)

(f)

Personal tax e-filing should remain voluntary.   This is essential to protect groups that might otherwise be disadvantaged, e.g. the elderly.   We are opposed in principle to the mandatory imposition of any e-filing, since this deprives HMRC of the motivation to provide a service that is likely to attract users on the basis of its quality and user benefits.

(g)

Pre-population of personal tax returns with information from employers, banks and other third parties should be introduced as a priority.

(h)

Tax e-filing should remain voluntary for all small businesses, including small companies, since such businesses and their tax advisers may not have appropriate e-filing facilities and skills and in some cases it would be unduly burdensome to impose these on them.

(i)

HMRC and the tax profession should agree on a way forward that recognises the importance of full disclosure and permits (for example) the electronic submission of appropriate attachments to e-filed returns, since otherwise e-filing will continue to place users at a legal disadvantage compared with taxpayers who file paper returns.

(j)

Email should be introduced as an option for all correspondence between HMRC caseworkers and taxpayers/agents, based on a voluntary opt-in by each taxpayer to overcome HMRC’s legitimate concerns about security.

(k)

System capacity bottlenecks should be avoided by more effective capacity planning by HMRC, combined with co-operation between HMRC and the tax profession on phasing of e-filing (e.g. by reference to monthly quotas).

(l)

As plans are formulated for the further development of e-services, HMRC should consult widely regarding any perceived threats to taxpayers’ privacy and data confidentiality, and in advance regarding any changes to tax law and practice that are considered necessary to accommodate e-service developments.   There is a need for such consultations to ensure that the taxpayer and agent community understands and supports the e-service objectives and shares in the resultant benefits.

Conclusion

The number of failures of HMRC IT systems to date is inexcusable from any perspective.   Private sector organisations with such a record would probably have gone out of business long since.

It is remarkable that the record of HMRC’s failures has not destroyed the enormous enthusiasm for effective e-services among the taxpayer and agent community, as evidenced (for example) by our recent member surveys here at ICAS.   It is a tragedy that so many IT worthy initiatives by HMRC have foundered in spite of the massive eagerness and goodwill that exists among users and potential users of e-services.

Given the apparent disregard by HMRC for accepted principles of IT project management and consultation with users, there is a desperate need for adherence to such principles from now on and for this to be accompanied by a transparency of process.   The need for such transparency has increased and continues to increase as a result of continuing failures of HMRC IT projects.   A significant change in approach is needed to restore confidence in HMRC’s ability to design and deliver e-services that taxpayers and agents will consider safe and of practical value.

We should welcome an opportunity to discuss these ideas with you.

Yours sincerely

Donald Drysdale

Assistant Director, Taxation

As at 29 August 2005