Dr Narmin Nahidi – Written Evidence (DFB0002)
Modernising UK Tax Administration: Compliance, Digital Reporting and Low-Value Imports
Submitted by Dr Narmin Nahidi, Assistant Professor in Finance, University of Exeter Business School
Summary
1. This submission addresses Questions 1–6 and 8 on correction of errors and reckless statements; Questions 9–14 on mandatory real-time reporting of benefits in kind; and Questions 15–18 on low-value imports.
2. I approach these measures primarily from the perspective of finance, financial technology, digital compliance and organisational behaviour. Across all three reforms, the central issue is not whether tax administration should become more digital. It already is. The more important question is whether obligations, information flows and sanctions are being redesigned together in a way that reduces errors rather than simply detecting them earlier.
3. Three themes run through the proposals. First, moving information closer to real time can improve transparency but may also move compliance risk from HMRC towards employers and taxpayers. Second, aggregate estimates of administrative savings can conceal substantial differences between large organisations with integrated systems and smaller organisations with fragmented processes. Third, digitalisation works best where errors remain easy to identify, explain and correct. A system that increases the consequences of error while simultaneously increasing reporting frequency may change behaviour in less predictable ways.
Modernising the correction of errors
Questions 1–6
4. The proposed legislation creates an explicit obligation for taxpayers to take reasonable steps to correct inaccuracies once they become aware of them. It would also allow HMRC to issue a Customer Correction Notice requiring a taxpayer to review their position and either correct an inaccuracy, make an appropriate disclosure, or explain why no correction is required. The obligation applies within existing statutory time limits.
5. Making the correction obligation explicit has an intuitive compliance logic. In behavioural terms, a clearly stated obligation reduces ambiguity about what is expected after an error is discovered. The more difficult question is what happens at the boundary between awareness, uncertainty and error. Modern tax returns frequently depend on valuations, classifications, estimates and professional judgments for which there may not initially be a single self-evident answer.
6. This matters because the consequences of failing to act are potentially substantial. Under the draft measure, where a taxpayer becomes aware of an inaccuracy and does not take reasonable steps to correct it or notify HMRC, the inaccuracy can be treated as deliberate for penalty and assessment-time-limit purposes. Following a Customer Correction Notice, the legislation also changes the treatment of certain subsequently identified errors.
7. The practical effectiveness of the measure is therefore likely to depend heavily on the interpretation of two expressions: when a taxpayer “becomes aware” of an inaccuracy and what constitutes “reasonable steps” to correct it. Those concepts appear straightforward in obvious cases. They become harder where a taxpayer receives conflicting professional advice, identifies a possible rather than confirmed error, or must obtain information from another party before determining whether a correction is necessary.
8. There is also a behavioural issue. Stronger consequences for not correcting known errors may encourage earlier disclosure and better record keeping. They may also encourage defensive behaviour: additional professional advice, precautionary notifications to HMRC, or corrections made despite genuine uncertainty. These responses carry costs even where they ultimately produce no additional tax liability.
9. HMRC currently describes the administrative impact on business as negligible, although it acknowledges that affected businesses will need to understand the new obligation and that one-off costs could include familiarisation and professional advice. The number of affected businesses is currently unknown. HMRC also estimates that implementation will require approximately £5 million of changes to its own IT systems.
10. The absence of an estimate of the population affected makes the “negligible” administrative-cost assessment difficult to evaluate. Administrative burden is not simply the cost of filing a correction. It includes identifying an issue, retrieving information, determining materiality, obtaining advice and documenting why a correction was or was not required.
11. A useful distinction for evaluating the measure is therefore between deliberate failure to correct a known error and failure to resolve an identified uncertainty quickly enough. The first is fundamentally a compliance problem. The second can arise even in organisations with strong controls.
12. The Chartered Institute of Taxation has similarly supported the objective of encouraging prompt correction while raising concerns that aspects of the draft legislation may create uncertainty unless obligations and safeguards are sufficiently clear.
13. Alternative administrative designs can be considered against the same objective. These include staged notifications, structured opportunities to disclose uncertainty before the full correction process is triggered, or digital prompts within HMRC systems. The relevant comparison is not simply which mechanism appears strongest, but which produces the greatest number of accurate voluntary corrections at the lowest combined cost to taxpayers and HMRC.
Proposed criminal offence of reckless untrue statements
Question 8
14. The separate consultation on reckless untrue statements addresses a genuine distinction in the current framework. HMRC notes that comparable offences already exist for indirect taxes, whereas direct-tax prosecutions generally require dishonesty where fraudulent evasion is alleged. The proposed offence would apply where a person is aware of a risk that a statement is untrue and nevertheless unreasonably proceeds to make it. HMRC expressly distinguishes this from carelessness or an innocent mistake.
15. The proposed maximum penalty is two years' imprisonment and/or an unlimited fine on indictment. HMRC presents this as a level below dishonesty-based offences and broadly aligned with the existing Customs and Excise Management Act offence.
16. From a compliance perspective, the crucial issue is likely to be the boundary between civil carelessness and criminal recklessness. The conceptual distinction is defensible: a taxpayer who fails to realise that a statement may be incorrect is in a different position from one who recognises a material risk and consciously disregards it. The practical challenge is evidential. HMRC's own examples show that the distinction depends significantly on what the taxpayer knew at the point the statement was made.
17. This has an important relationship with the correction-of-errors measure. One reform increases the consequences of failing to deal with an error once it becomes known; the other potentially criminalises proceeding with a statement while consciously taking an unreasonable risk as to its accuracy. The two measures therefore need to be understood as part of the same behavioural architecture. Taxpayers need to be able to distinguish a reasonable unresolved position, a careless mistake, a known error awaiting correction and reckless conduct.
18. The deterrence effect of a criminal offence cannot be assumed from the maximum sanction alone. It will depend on taxpayers understanding the threshold, believing enforcement is credible, and being able to distinguish the targeted conduct from ordinary error. HMRC itself recognises that uncertainty about this threshold could increase demand for guidance and professional advice.
Mandatory reporting of benefits in kind through RTI
Questions 9–14
19. Mandatory payrolling is now being phased. From 6 April 2027, company cars, car fuel, vans, van fuel and employer-provided medical benefits will enter mandatory real-time reporting. Most remaining benefits will follow from April 2028, while loans and accommodation remain outside mandatory payrolling for the time being. HMRC has also subsequently confirmed that employers will be able to exclude globally mobile employees from mandatory payrolling using a new service expected to become available in November 2026.
20. The phased approach materially changes the implementation risk compared with introducing almost all benefits at once. The Phase 1 benefits are relatively common and, particularly for cars and vans, already have established reporting and calculation structures. ICAEW has welcomed the phased timetable and the reduction in required RTI data fields, while noting the earlier concerns of employers and software developers about readiness.
21. Nevertheless, “real time” reporting changes the operational model. An annual process allows information to be collected, reconciled and corrected after the year end. A payroll process requires sufficiently accurate information to reach payroll according to a recurring timetable. The burden can therefore move from year-end reporting to continuous coordination between HR, payroll, finance, fleet management, insurers and external providers.
22. This distinction is important when interpreting HMRC's administrative-cost estimates. HMRC currently estimates approximately £8 million of one-off business costs. It estimates continuing annual costs of around £1 million and annual savings of £19 million, producing a net annual administrative saving of approximately £18 million. HMRC also expects its own IT changes to cost around £10 million.
23. Those figures may prove accurate in aggregate, but aggregate savings are not necessarily distributed evenly. A large employer with integrated HR and payroll systems may eliminate significant P11D processing costs. A smaller employer, or an organisation using several external providers, may face proportionately larger fixed costs from system configuration, process changes and staff training.
24. HMRC's assumption that software costs will be negligible because upgrades are generally incorporated by software providers also deserves to be distinguished from wider systems costs. Updating payroll software itself is one matter. Connecting payroll reliably to the internal systems in which benefit information originates is another. Data extraction, validation, reconciliation and exception handling are often where digital reporting reforms create costs.
25. The first year will therefore provide an important test of whether the reform genuinely reduces errors or merely moves them into payroll. The temporary penalty easement for certain non-deliberate inaccuracies during initial implementation recognises that transition risk.
26. A meaningful assessment of implementation would consequently examine more than the number of P11Ds removed. Useful indicators include the number of payroll corrections, employee queries, amended Full Payment Submissions, late adjustments and cases requiring parallel year-end reporting. These provide a better indication of whether administrative activity has disappeared or simply moved elsewhere in the organisation.
27. HMRC has clearly responded to stakeholder concerns by delaying the original timetable and subsequently introducing a phased rollout. Mandatory payrolling was initially announced for April 2026, later moved to April 2027, and then divided between the April 2027 and April 2028 phases. This is evidence that consultation has affected delivery rather than simply validating a predetermined implementation plan.
28. The remaining implementation risk is timing. As at September 2026, HMRC is continuing to update guidance and technical specifications ahead of implementation in April 2027. For larger employers, payroll changes normally require specification, development, testing, employee communication and integration with other systems. The relevant readiness question is therefore not simply whether guidance is available before April 2027, but how much stable implementation time employers and software developers have after the final requirements are known.
Reforming customs rules for low-value imports
Questions 15–18
29. The economic context for the low-value import reform is significantly different from when the existing relief was designed. HM Treasury reports that low-value import volumes tripled between 2021 and 2024. The current regime allows consignments valued at £135 or less to receive customs-duty relief, although VAT has applied to low-value imports since the 2021 reforms.
30. The proposed framework removes the £135 customs-duty relief and creates new mandatory arrangements. Sellers and online marketplaces will be expected to supply item-level information, and the government has confirmed quarterly payment of customs duty, with the possibility of aligning payment cycles with VAT returns. The UK Global Tariff will apply rather than a separate simplified tariff. Detailed operational requirements will follow through secondary legislation and technical specifications. Implementation is planned by October 2028 at the latest.
31. The policy challenge is unusual because of transaction volume. A compliance process that costs only a small amount for an individual parcel can become economically important when applied across very large numbers of transactions. System architecture, automation and data quality therefore matter at least as much as formal reporting requirements.
32. The government's consultation already identifies the main operational constraint. Some sellers and marketplaces hold the required product data in structured form; others rely on fragmented systems and third parties. Country of origin, net mass and accurate product classification can be harder to capture consistently.
33. This creates an information-quality problem. Requiring more fields does not automatically generate better customs information. If product classification and origin data are poor at source, mandatory digital transmission can transmit incorrect information more efficiently without improving its underlying reliability.
34. The reforms may also affect market structure. Fixed compliance costs are easier for high-volume platforms to absorb than for small overseas sellers. The government's consultation responses record concerns that the fiscal-representative model and joint and several liability could increase costs and reduce participation by smaller overseas businesses. Respondents also warned that specialist goods without close UK substitutes could become less accessible.
35. These effects need not mean that the reform will reduce competition overall. UK retailers and other respondents have argued that the existing arrangements can disadvantage domestic businesses and that more consistent customs treatment would improve competitive neutrality. The relevant economic issue is therefore two-sided: reducing regulatory differences between bulk freight and low-value imports while avoiding compliance arrangements that unintentionally concentrate cross-border e-commerce in a small number of very large platforms.
36. The existing VAT model provides a useful comparison. Since 2021, VAT on many business-to-consumer low-value imports has been collected at the point of sale, with online marketplaces responsible where they facilitate the transaction. This places liability on entities that often possess both transaction data and the technological capacity to collect tax at scale.
37. The customs reform introduces additional complexity because tariff liability depends on product classification and potentially origin, not simply sale value. The government's consultation responses show that businesses generally favour avoiding parallel VAT and customs systems where possible, because duplicate systems create reconciliation costs and greater scope for error.
38. The proposed additional fee for low-value imports adds a further operational dimension. The government has confirmed that a fee will be introduced but its final design and level remain under development. Consultation respondents raised both administrative and consumer-price implications, with many favouring a per-consignment rather than per-item structure as simpler to administer.
39. October 2028 provides a substantial implementation period in calendar terms. Whether it is sufficient operationally depends on when the final technical requirements are fixed. Sellers, marketplaces, parcel operators, software providers and intermediaries are interdependent. Testing cannot be completed effectively until each participant knows the data standards, liability structure, payment mechanism and error-correction process it must support.
Concluding observation
40. These three measures appear different, but they raise the same underlying question about modern tax administration. Digitalisation reduces some forms of friction while creating new dependencies on data quality, systems integration and timely correction.
41. A useful distinction is therefore between reporting faster and complying better. Real-time systems can improve compliance where information is reliable and errors can be corrected easily. Where data are uncertain, fragmented or dependent on multiple parties, greater reporting frequency can also increase the number of corrections and exceptions.
42. The longer-term test of these reforms is consequently not simply whether HMRC receives information earlier or whether individual legacy forms disappear. It is whether the overall system produces more accurate information, fewer unresolved errors, lower combined administrative costs and clearer accountability between taxpayers, employers, platforms and HMRC.
Submitted in a personal academic capacity. The views expressed are my own and do not represent the University of Exeter.
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