Taxman's $1.5b upgrade faces challenges

22:13, Jun 29 2014

Inland Revenue expects the project to replace its computer system and modernise the tax system to cost up to $1.5 billion, but in spite of the massive budget, or perhaps because of it, there seems to be almost an assumption that the business transformation programme will fail.

Revenue Minister Todd McClay and Inland Revenue deputy commissioner Greg James addressed more than 100 technologists at a breakfast organised by the Institute of Information Technology Professionals in Wellington on Thursday.

The first question from the audience was why the public sector, having botched far smaller projects like Novopay, reckoned it was qualified to pull off one possibly costing $1.5b.

McClay and Inland Revenue won plaudits for being open and willing to engage with the domestic industry, but their humility and progressive approach have done little to alleviate people's nerves.

Inland Revenue faces at least two tricky decisions. James says it plans to keep its existing First computer system running in parallel with its new computer system for a period.

That's a seemingly sensible lesson from Novopay. The idea is to reduce the risks inherent in suddenly switching from one working system to another untested one.

But running two taxation systems in parallel won't be as simple as running duplicate payroll systems. The challenge is that at the same time as replacing its computer system, Inland Revenue will be attempting, in McClay's words "the biggest change in the tax system, almost ever".

The main reason Inland Revenue is replacing First is that its 40 million lines of Cobol code can't easily be adapted to meet new requirements, so it stands to reason that First won't be able to run the new tax system in parallel with the department's new computer system, only the old one.

James responds: "What we believe we need to do . . . is to keep the old system chugging over as we are using the new system as the master."

But he admits it would get complicated if the inputs changed; for example, if tax modernisation meant taxpayers were submitting data for different, shorter time periods than those currently managed by First. How would Inland Revenue handle that? "That's the bit we don't know yet, " he says.

The second, related dilemma is how ambitious the modernisation programme should be. The Government would love to move to a system where individuals' and businesses' tax affairs were reconciled in "real time".

If Inland Revenue could keep a constant running tab on everyone's taxable income and tax payments, it could do away with both provisional tax and the controversial tax refund industry. People and businesses could instead be taxed right first time, all the time, and politicians could claim taxpayers had got a lot in return for the $1.5b spent.

McClay said at the IITP breakfast that early research suggested as much as 2.5 per cent of the country's gross domestic product might be eaten up by tax compliance.

But a fully automated, real-time tax system is probably a pipe dream and might throw up some anomalies. In a real-time world, the rate of tax people had deducted from incoming payments might vary from one day to another as their fortunes ebbed and flowed.

McClay has hinted at a compromise; businesses might be obliged to pay provisional tax three months or six months in advance, instead of a year in advance, for example.

The Government has some other bones it could throw at businesses as it grapples with Inland Revenue's transformation. Cutting the penalties and excessive interest rate payments that apply to accidentally under- paid tax might help keep small businesses sweet, while its boffins deal with the hard stuff.