4.1 External parties and intermediaries already play an important role in the tax and transfer system.
4.2 In a more digital environment this role is likely to expand as external parties play three overlapping roles:
- The traditional tax agent/intermediary function – helping taxpayers determine and pay their tax liabilities.
- Providers of products and services that taxpayers use for a business purpose that as a by-product assist taxpayers with their tax. For example, a job matching website where the platform provider manages payments and tax obligations for employees and contractors.
- Entities that provide access to services which are unrelated to tax, but which use tax information and require some form of access to data held by Inland Revenue.
4.3 The expanded role will come from the development of niche products and adaptation to suit smaller groups of customers. Inland Revenue’s strength lies in delivering at scale, so is more attuned to standardised bulk-processing solutions, whereas we see the private sector complementing this with more customised services.
4.4 Another benefit from private sector involvement is the relationship such entities develop with taxpayers. Some taxpayers prefer to deal with their tax affairs through intermediaries rather than directly with Inland Revenue. This is particularly the case where software developers are providing new services based on integrating data from a range of sources, such as banking, tax, and other business records. Taxpayers who want advice based on a holistic view of their financial situation will get this from a private sector provider rather than Inland Revenue.
4.5 From a policy perspective, the issue is the regulatory environment in which external entities interact with the tax and payments system.
How Inland Revenue works with external parties
4.6 Given a greater role for external parties, the goal will be to create a seamless boundary between them and Inland Revenue so that their customers have a flexible and convenient experience when paying tax and receiving entitlements.
4.7 External parties will connect with Inland Revenue digitally through Inland Revenue’s gateway services. Gateway services refer to the web services that allow third parties to integrate their services with Inland Revenue’s systems.
4.8 With the conclusion of business transformation, Inland Revenue will be more open to accepting applications from external parties so that they can access the gateway services. In anticipation of this shift, Inland Revenue is engaging with a wide variety of entities to better understand their business models, the types of services they are providing and consequently the types of gateway services they want to access.
4.9 More information about Inland Revenue’s gateway services and how external parties can access them can be found on Inland Revenue’s website.
Regulation of external parties
4.10 The traditional approach to regulation has focused on the roles that entities play in the tax system. The Tax Administration Act 1994 describes different types of entities, such as tax agents or PAYE intermediaries, with further sections of the Act defining the entry requirements and rights of the entity types.
4.11 This approach is becoming less fit for purpose. There are new entities whose services cross the boundaries that previously defined the types of entities. Overcoming the rigidities in the current framework has led to inefficient workarounds.
4.12 The following approach could form the basis of a new regulatory framework:
- As a starting point, all parties involved in the tax system must have an obligation to uphold the integrity of the tax system. What this means in practice might differ by the role the party plays, but the concept will still apply.
- All external parties interacting with Inland Revenue through the gateway services would also be required to comply with the technical/compatibility and security standards that Inland Revenue sets for its gateway services.
- External parties’ access to Inland Revenue services and data should be based on the role they perform for their customers and what data is required to fulfil that role. A tax agent for all of a taxpayer’s affairs would require access to all that taxpayer’s files and data, whereas a party who assists a taxpayer claim a donation tax credit would have limited access based on providing that service.
- The service the external party is providing for their customer will also dictate how they interact with the Inland Revenue system. Some parties will “read” data (for example access information held by Inland Revenue), while others will “write” or “amend” data (for example someone acting as a tax agent for a taxpayer who supplies data or a tax return to Inland Revenue).
- Standards would apply to each of these functions. For example, if parties access data held by Inland Revenue, there would be obligations relating to privacy and secure storage of that data. If a party is amending data, there would be obligations around accuracy and reliability.
- Failure to meet the standards could lead to loss of access.
4.13 Tax advisors are another group of external parties. Often their role will overlap with that of a tax agent and in a practical sense the roles of agent and advisor will be indistinguishable, but in a pure sense advisors’ relationship is solely with the client (taxpayer) and not with Inland Revenue.
4.14 The advisor plays an important role in ensuring compliance, providing advice, and acting as a bridge between Inland Revenue and the taxpayer. They advise taxpayers based on their circumstances in ways that Inland Revenue is not suited to. For the tax system to work well, advisors need to act to support the integrity of the tax system.
4.15 Currently, there is no specific regulatory obligation on the advisor from the perspective of the revenue legislation, though in practice the majority are members of a professional organisation that imposes educational and ethical standards on them.
4.16 We are considering whether the regulatory framework should specify requirements for the tax advisor or whether general obligations for all parties to uphold the integrity of the tax system would be sufficient.
Regulation of systems
4.17 In a digital world, taxpayers will use systems that will “tell” them how much tax to pay.
4.18 This is like the role of the advisor but there is a subtle distinction between the advisor applying judgement to advise on how much tax to pay and a software programme applying rules to advise on how much tax to pay. From the perspective of the integrity of the tax system, for the first situation there is an expectation of care. For the second situation there is an expectation of following the rules.
4.19 Any regulatory framework for external parties needs to consider the role of system providers. We anticipate obligations on these entities relating to accuracy of tax calculation, with Inland Revenue support by testing of these systems.
Co-dependence of Inland Revenue and external parties
4.20 As external parties play a greater role in the administration of the tax and transfer system, there will be a greater interdependence between them and Inland Revenue. Potentially, Inland Revenue will need to view external parties’ operations as integral extensions of Inland Revenue’s operating model.
4.21 Feedback from the private sector suggests business transformation has provided an effective platform but that improvement is needed to enable external parties to participate effectively.
4.22 Different mechanisms may be required to support these developments. This would involve mechanisms to consider whole of system perspectives in investment decisions. It might also mean bringing additional perspectives into the consultation process for new tax policy proposals, to get feedback on the system and digital elements of any proposal.
Supporting the development of social policy
4.23 Inland Revenue administered social policies such as Working for Families can be difficult for recipients to manage. Eligibility and entitlement depend on family composition and estimates of income. Where recipients fail to notify Inland Revenue of changes in their circumstance, or do so with a delay, recipients may end up being overpaid, leading to debt.
4.24 It is possible that external parties could develop products that would help recipients identify if they are eligible for support and manage their entitlements. However, a factor that might deter investment in these types of products is that recipients will be lower income so their ability and willingness to pay may be limited.
4.25 Consequently, there is an argument that subsidising these products could be beneficial if it encouraged their development and uptake. The benefits could include:
- Improved fairness if people get the benefits they are entitled to.
- Lower compliance costs for recipients.
- Lower administration costs for Inland Revenue if there are fewer instances of under or over-payment.
4.26 A precedent for this intervention is the subsidy the Government provided to payroll intermediaries to encourage the use of specialist payroll firms.
Questions for submitters
- Are there roles that external parties play, or could play, in the tax and transfer system that have not been recognised?
- Do you agree that the regulatory framework for external parties, as currently set out in the Tax Administration Act, should change?
- Is the distinction between a tax advisor (who provides advice to a taxpayer about tax liabilities) and another intermediary involved in the tax system useful when considering the regulation of external parties?
- What changes does Inland Revenue need to make to enable external parties to contribute to the tax and payments system?
- Should the Government consider subsidies for products that assist social payment recipients?