Re-imagining tax collection and accountancy for the 21st century economy

The emergence of blockchain technology in the last ten years has led many observers to question the role of traditional financial intermediaries for guaranteeing transactions between parties.

The services banks provide for the fees they charge is already being called in to question and the meteoric rise of value for some digital currencies has captured the imagination of much of the public. The blockchain can however be applied to so many other aspects of people’s lives, whether it be, data management, logistics, healthcare records, entertainment to name but a few.

There is a clear disruption in the way in which SMEs and the government interact with tax reporting and collection. As of now, blockchain is not typically used for tax collection but the permanence of data recorded in blockchains makes it resilient to manipulation for fraudulent purposes.

There are already some promising applications for blockchain technology in government services such as land registries and voting systems, it’s not hard to imagine tax collection being added to the areas for blockchain experimentation. Blockchain’s core attributes mean that it has significant potential for use in tax due to its:

• Transparency: blockchain provides provenance, traceability and transparency of transactions
• Control: access to permissioned networks is restricted to identified users
• Security: the digital ledger cannot be altered or tampered with once the data is entered. Fraud is less likely and easier to spot
• Real-time information: when information is updated, it’s updated for everyone in the network at the same time

Blockchain appears to be evolving into a foundation technology in that it enables people to reimagine a large variety of existing processes and interactions.  It may have the potential to change the very fabric of society, bolstering the growth of an ecosystem that replaces traditional mechanisms with modern, relevant infrastructures, suited to the increasingly digitalised and decentralised world.

Businesses like EZYcount see blockchain as a means to simplify and streamline tax reporting and collection for SMEs and the government bodies representing them. As we enter the modern digital era and sharing economy, fewer people will be trading and exchanging physical goods for which the current tax systems were designed. E-commerce and division of shared revenues and profits will increasingly play a more prominent role in how the tax system is conceptualised and the blockchain could well provide the catalyst needed to re-imagine the current system.

The rise of the sharing economy, digital business and new business models have caused many people to think again about the tax system. Does it still make sense for tax authorities to collect tax as they always have done in the past? In a transaction-based world should the tax system adapt to follow suit? But where is value created, and how should it be taxed?  Blockchain is enables taxes to be reported and declared by multiple parties in real time for authorities to assess and judge.

Tax compliance by design

A transparent ledger would provide potential visibility right down to the transactional data. So in principle, the tax administration could view related party transactions in real time and test the accuracy of the pricing model used.

As a result, tax administration ‘has the potential to move the function from retroactive analysis and historical financial information gathering to a position where transactions, expenses, assets and liabilities can be recorded in real time and publicly scrutinised. Mistakes, risk and fraud could, in theory, be eliminated.

What does blockchain mean for tax authorities?

Blockchain is likely to be of value to tax authorities and to regulators because it provides accurate information that can be shared, and may allow earlier collection and oversight of transaction related taxes. Tax authorities, would however need to obtain information from every taxpayer.

Mandating digital data from every VAT trader in the country, even those that maintain ledgers for traditional stores that have resisted digitalisation, will be an enormous step and cost money. This should be taken into consideration when assuming that blockchain will add value to the tax world, that said tax avoidance from SMEs in the UK alone is estimated to be £5.2bn a year according to HMRC.

It’s unlikely that tax is the main priority when businesses think about blockchain; the focus tends to be blockchain’s potential to reduce transactional costs – but if it also results in a more streamlined, efficient and effective tax function, that would be a significant bonus for both SMEs and the tax authorities they report to.

Using the blockchain to record financial transactions enables government bodies, after receiving some rights from the company, to audit the transactions. By doing so, it allows government bodies to trace financial flows between corporations and better understand if corruption is taking place. Fake transactions, fake invoices and others strategies will lose all interest.

Transparency on this scale would eliminate corruption and tax avoidance altogether creating a fairer, more streamlined and easier to use tax reporting infrastructure.