How blockchain technology could improve the tax system

There’s a growing buzz of excitement around blockchain and its potential to transform business. But what could it do for the world of tax? We brought together some of the UK’s leading blockchain experts with tax specialists from the private and public sector to explore the benefits.

Blockchain: the benefits

Blockchain’s core attributes mean that it has significant potential for use in tax:

  • 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: key findings

  • While blockchain is not the cure all for the tax system, it could be applied in a number of areas to reduce the administrative burden and collect tax at a lower cost, helping to narrow the tax gap
  • Blockchain could cut costs and add value within a business, between businesses, between businesses and consumers, and between businesses and governments
  • There is a need for experimentation and courage to try different applications
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Data and transparency

An ongoing challenge for tax functions is accessing the full spectrum of information from across their business that could be relevant to tax. Organisations now have the ability to collect and collate enormous amounts of data but the tax function is rarely involved in that process. As a result, tax functions can be consulted too late on issues and decisions that have tax implications.

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Verifying transfer pricing

Blockchain suits transactions and could be applied to transactional taxes, such as VAT, withholding tax, stamp duties and insurance premium taxes. The technology could also help with transfer pricing. For example, could it codify the judgments made when establishing how profits are attributed to different parts of a business? It was agreed there was nothing to stop this being done from a technology perspective.

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Could blockchain transform tax entirely?

Blockchain has emerged at a time when many in the tax world are thinking about whether the current tax system – which was designed for the days when physical goods were traded, bought and sold – is still fit for purpose in the modern, digital era.

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?

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Blockchain, error and fraud

Blockchain makes fraud and errors far easier to detect because the system provides clear and transparent information about transactions and items in the network. This could be particularly useful in tracking if and where VAT has been paid, and in doing so reduce VAT fraud.

Blockchain could also help to drive behavioural change because of the risks and consequences of non-compliance. It’s more likely that you’ll be caught and forever excluded from the blockchain network. In these ways, it is likely blockchain could help reduce the tax gap to some extent.

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Contact us

Kevin Nicholson
Head of Tax
Tel: +44 (0)20 7213 2794
Email

Laetitia Lynn
Head of tax communication strategy
Tel: +44 (0)20 7212 3761
Email

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