Why almost everyone is wrong about HMRC's plans to sell data

Profile picture for user gonzodaddy By Den Howlett April 22, 2014
Summary:
Opening up business data is a key ingredient in ensuring that tax practitioners have the best information to meet client needs. Resisting that is stupid.

HMRC
The uproar over HMRC's plans to sell data upon which Phil Wainewright opined is almost laughable. Or at least it would be if the idiots making noise about it had any clue what they are talking about.

In 2008, one of the now well known cloud ERP providers was better equipped than almost everyone else to weather the recession storm. Why? Because they saw patterns of activity among their customer base that suggested a significant slow down in the economy long before the recession took hold.

Consistently down the years, I have argued that the data collected by cloud accounting vendors is so valuable that it would one day make sense to give the application away and sell the collected data as a service back to any number of third parties. No surprise to find I don't get many takers for that argument, despite the obvious massive economic upside.

Going back further, in the period 1983-93, I regularly crossed swords with HM Revenue and Customs officers - then called HMIT - in my capacity as a tax compliance advisor. The usual argument went something like this:

Dear Sirs

We have reason to believe that  your cient XXX has understated income for the year YYY, based upon our understanding of their business. Accordingly, we would like to examine the books and records to satisfy ourselves that your clients accounts are correctly stated and that they have fully disclosed their income.

Clients of course were mortified and we'd then have to figure a strategy that avoided the least amount of tax, interest and penalties (which always went back six years) to pony up. It doesn't take a brain surgeon to understand that while the tax involved might be small in a current year, the interest, penalties and then scaling back over six years as adjusted for inflation had a high multiplying effect that could often run many thousands of pounds.

One of the key weapons HMRC had to hand were unpublished statistics covering numerous business types. Over time we got to understand something of what they 'knew' and had ways to push back against gross margin estimates, pricing data and so on. We could do this because we collected our own data on local business types from actual results we collated and could normalise the data and patterns we saw across thousands of businesses.

At one time, I contemplated seeking to aggregate what we knew with data from other local practitioners but that was a step too far - and not for the privacy reasons one might think of today. Their data was mostly poor quality so it made no sense for us to give away a significant competitive advantage.

HMRC for its part only had national data which of course did not take account of regional or local differences. Some HMIT Inspectors were aware of this and got pretty good at doing their own homework, which of course was based upon much larger data sets than we could muster. That made for interesting conversations and negotiations.

Part of the reason the conversations were interesting was because at the time HMIT was hobbled from being able to share the data it held. We on the other hand were free to do so. That in turn meant we always had the potential of a winning hand. This was especially true if HMIT threatened a hearing in front of the General Commissioners for tax - the body who would decide contentious cases of fact. More often than not. we were able to take the fight to HMIT, arguing our client's right to be heard before GC on fact based issues where we knew were on solid ground.

An example might be gross margins on beer sales. We knew pretty accurately what publicans should be making in our region so that when HMRC came back claiming it should be higher, we could often produce evidence to the contrary. You only need to know the price of a pint in London compared to the regions and shires in order to understand how we were able to win. In worst case scenarios, we were always able to mitigate the damage.

Another example might be local Post Office retail margins on non-post office goods sold. (Yes - those were the days.)  In fact, our data was often so good (or rather compelling), that we mostly left HMRC looking for crumbs.

Guess what? We looked like heroes in the eyes of our clients when in reality we were merely following the numbers and constructing arguments accordingly. Today, I suspect we'd be hailed as 'data scientists' in the popular press when in fact we were business data analysts.

Fast forward to 2014, and as The Guardian correctly states:

Ross Anderson, a professor of security engineering at Cambridge University, said the information could be highly useful to credit rating agencies, advertisers, and retailers wanting to practise price discrimination.

If I was a tax practitioner today, I'd welcome HMRC sharing data just to find out how accurate their results really are and probe the basis of analysis.

I'd want to see what benchmarks they apply so that I could tweak my client facing models. I'd be delighted to learn how they assemble stats and what they mean. Why?

Because HMRC has a much larger pool of data from which to draw than I could ever have at my disposal. More importantly, the tools available today are much more capable and sophisticated than the relatively crude databases and statistical compute tools we had 20-30 years ago.

Anyone who thinks that the side issue of privacy is going to stop HMRC and other state agencies from collecting and using the data is not in the words of David Davis MP 'borderline insane.' Those same loud mouths are out with the bloody fairies and doing their constituents a massive dis-service.

What's more, if such data was available then it would force the current crop of cloud accounting vendors to unlock their databases, a topic upon which most of them have fought shy in the last few years, often using the shield of privacy as part of what I believe is a poorly constructed argument.

Absent of the private providers getting on the data train, government will (if it already doesn't) have powerful weapons with which to make cases that would have been almost inconceivable back in my day. Anyone who thinks that's a good idea in what would almost certainly be an incredibly uneven contest needs their heads testing.