UK.gov's no-deal plans leave HMRC customs, VAT systems scrambling to keep up

Pity the external software devs – they only just found out about this!

The government's no-deal Brexit scenario has thrown another technical spanner into HMRC's works, as bosses admitted delivering the plan would put a strain on its other work.

A fully functional, optimal system will not be in place on 1 April 2019 – HMRC bosses

At the same time, the final release of the new Customs Declaration System has been pushed back to March 2019, meaning the existing system will have to lumber on in parrallel. Tests to see whether it can cope with the strain are only just over halfway through.

The strain that the UK’s tax collection department is under came into stark relief during a session in front of the influential House of Commons Public Accounts Committee yesterday.

HMRC permanent secretaries Jim Harra and John Thompson were grilled on their department’s work by the MPs for about two-and-a-half hours, covering everything from biometrics to online marketplaces.

The most pressing issue is clearly how it will cope with Brexit, especially with the prospect of a no-deal scenario.

When Thompson was asked if the department could cope with the latest change, let alone any further political decisions, he said leaving without a deal would be “sub optimal” – but that didn’t mean the border wouldn’t function.

“To get to an optimal system [in place] takes up to three years… we need to be clear a fully functional, optimal system will not be in place on 1 April 2019,” he said. “But that doesn’t mean you can’t run a border and trade – those things are quite different.”

No deal plans 'quite a challenge'

The department is racing to finish the already-planned replacement of the CHIEF (Customs Handling of Import and Export Freight) system with CDS before the UK leaves the bloc in March 2019, but has been forced to admit that the two will have to work concurrently.

Thompson said the first release (for selected business and certain imports) launched on time, on 14 August, and the second release (for further imports) is on track for autumn. However, the third release (for exports) will be pushed back from January to March.

“Therefore, the strategy of using CHIEF for export and CDS for import is one which needs to be tested,” he said.

The department is five weeks into an eight-week test to see if CHIEF can scale up and handle the increased workload, he said, adding the test was, “so far, good”.

HMRC only discussed it with external software devs after gov.UK released technical notes...

But a further challenge faces the department, as the government last month announced its plans for customs and VAT if the UK leaves the European Union without a deal.

This will see acquisition VAT – for movements between the EU and UK – replaced by import VAT. This is usually collected earlier, and so is a cashflow disadvantage to businesses – to combat this the government said it would introduce postponed accounting for all import VAT.

HMRC has only been able to discuss the issue with the external software developers since the government released the technical notes, he said, adding that although they “may be relatively transparent to us” they might want to keep the extra costs “fairly confidential”.

Harra said the switch poses “quite a challenge” for the department, because it impacts both the functioning of CDS and the functioning of another IT programme HMRC is battling to deliver on time, Making Tax Digital.

As this means “switching off bits of how customs currently works and switching on new bits of how VAT works”, he said, both HMRC and external software developers will have to have contingent products ready for use from 29 March 2019. Good luck, devs.

HMRC will be monitoring progress “extremely closely” from now up until March 2019, Harra said, adding that the project would be a high priority – which he admitted did mean “other things will shuffle down”, but didn’t specify which might be affected.

Amazon, eBay and intermediaries

But HMRC doesn’t just have to deal with Brexit, and the MPs used the session to rattle through the other issues the department had on its plate.

The taxman has been told repeatedly to toughen up on online traders that use marketplaces like Amazon and eBay but don’t pay the right amount of tax. It is estimated to miss out on between £1bn and £1.5bn each year this way.

Measures were introduced in 2016 aimed to make it easier to enforce this compliance, and Harra said that up to 30 June 2018, the department had received £150m additional VAT unprompted from sellers who had registered. It had also issued joint several liability notices to other sellers that resulted in a further assessment of £160m.

Some 43,500 new applications to register had been received, up from the 27,000 reported by the PAC in June.

Meanwhile seven marketplaces have now signed up to a voluntary memorandum of understanding that commits them to sharing data on traders with HMRC.

Harra said these measures were working in practice – the marketplaces were providing the data on an ongoing basis and were “acting very promptly” on serving joint several liability notices on traders.

Additional obligations have also recently put the onus on the marketplaces to police overseas businesses, rather than waiting for the notices to be served from HMRC, he said.

Thompson, meanwhile, was asked about another potential tax dodge caused by the use of intermediaries, and – although he wouldn’t name names, he said it involved apps most people had on their smartphones.

The government has given HMRC the power to force these intermediaries to hand over information, which he said had been a “good step forward”.

As an example, he pointed to a Leeds restaurant that declared two sources of income – cash and bills paid through debit or credit cards. But, because of the access to intermediary information, HMRC discovered its turnover was five times higher, as it was funnelling payments received through the intermediary into a separate bank account.

Biometric investigation ongoing

The execs were also grilled on their slurping up of users’ biometric data – its Voice ID system has slurped up millions of taxpayers' voice profiles, but it was earlier this year accused of doing so without the right permissions.

Thompson said the department felt it had been acting lawfully, by relying on the implicit consent of users, but that the complaint had offered “a learning point” for HMRC.

He acknowledged that the original messages read out to callers had not explicitly stated it was possible, or how, to opt out of the voice ID system – but noted the message had been updated to make it clear in July.

When asked whether HMRC would delete the profiles of the 6 million people who had registered before the wording was changed, Thompson said it would wait until the Information Commissioner’s Office had completed its investigation.

He also promised to provide the committee with details on how many people had opted out of the registration before and after the wording was changed. ®