HMRC bets the farm on digital. What could possibly go wrong?

Big questions over what that £1.3bn is for, and what it will achieve

Comment HMRC has promised to throw £1.3bn at its creaking IT to transform itself into the most "digitally advanced" tax administration in the world. By doing so, it also hopes to save significant piles of cash and offset major cuts. But for many, this whole venture represents a major gamble.

To much fanfare the department announced this week it would end the current "bureaucratic form-filling" process by 2020 "transforming tax administration so it is more effective, more efficient and easier for taxpayers".

That follows on from the Spending Review, which claimed the £1.3bn of digital investment over the next four years will yield £1bn in extra tax revenue after 2020.

There's no question the department's systems badly need an overhaul. Its £10.7bn Aspire contract with Capgemini and Fujitsu, which started in 2004, has been described as the most expensive government IT contract. Spending watchdog the National Audit Office has repeatedly said that figure does not represent value for money.

However, the move to exit the contract, which soaks up 84 per cent of the department's budget, has been deemed as high risk by MPs. It has already been extend by three years, with the department having recently commissioned management consultancy Bain, at a fee of £20m, to help extricate from Capgemini's grip by 2017.

Any plans to modernise its systems and take out significant costs will be inextricably linked with the Aspire deal.

Jessica Figueras, chief analyst at government IT experts Kable, believes the additional £1.3bn promised to digitise HMRC by 2020 is money that has been costed from the Aspire contract.

"HMRC is planning to save 25 per cent of the costs of Aspire by replacing it," she said. Last year HMRC spent £874m on IT and digital. "Put it another way – HMRC's stated plan is to spend less on digital and IT, not more."

Figueras also points out that for all the talk of digitisation, back in 2012, 85 per cent of HMRC's transactions were already digital. For example, all businesses now do their PAYE, VAT and other taxes online and most self-assessment tax users online.

However, the department has already costed those 'digitisation' savings, expecting the efficiencies yielded will plug the £717m per year in cuts, including a headcount reduction of 21 per cent by 2019-20. Yet the Office for Budgetary Responsibility estimates those savings remain "highly uncertain".

Add in to the mix the government's troubled history of IT projects and the fact that HMRC's system underpins the government's entire £500bn tax income, and the outcome is an extremely high stakes game.

Jolyon Maugham QC, a tax barrister who specialises in litigating avoidance schemes, questioned the wisdom of making cuts to HMRC before the expected digitisation savings come through. "It is a gamble," he said. "Research from the OECD has demonstrated that if there's a perception that the tax [regime] isn't working, people become less tax compliant." The results could be the loss of billions for government.

Another major challenge the department faces is the issue of online authentication. The main process by which the people identify themselves is still through the Government Gateway, designed more than a decade ago. However, the National Audit Office has warned that this system badly needs replacing.

Currently, there is no working replacement which could be used and scaled to suit the various forms of tax transactions required. The Government Digital Service's Verify system only works for textbook self assessment users with an established digital footprint. It will not authenticate businesses, or third parties, such as accountants.

To date the system has failed to get off the ground, and was abandoned when rolled out for farmers in favour of a telephone service, due to their more complicated tax circumstances.

Sources say HMRC is currently building its own online authentication system instead.

Daniel Thornton, programme director at the Institute for Government, a think tank set up to make government more efficient, is broadly positive about the potential to make HMRC more efficient. However, he notes the many plates the department must keep spinning, while attempting to introduce multiple changes.

"There's a whole raft of things going on. They're bringing Aspire in-house and setting up new private company, closing offices, moving people around, shrinking its number of staff, and making available a big budget for digital transformation. At the moment I'm not sure how it all relates," he said.

If the department is to come close to its cost saving ambitions, it will have to ensure all those moving parts are working effectively. ®

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