Is Estonia a blueprint for how digital taxes could work in the UK?

In Estonia, citizens file their tax returns in less than three minutes, with accountants accessing clients’ income and pensions info within just a few mouse clicks.

With the UK hoping to develop the world’s most advanced tax system, is this what the future looks like?

Welcome to e-stonia: the most wired country on Earth…

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In November 2015, the UK government pledged to create “one of the most digitally-advanced tax administrations in the world” where every citizen and business “would have their own digital tax account by the end of the decade.” Six years on, this vision hasn’t exactly come to fruition, with HMRC’s Making Tax Digital initiative being delayed due to software concerns, slow uptake by SMEs and the Covid-19 pandemic.

Yet, by April 2022 all VAT-registered businesses will need to be MTD-compliant, with all self-employed businesses following a year later: a firm signal that HMRC is pressing ahead fast with its plans to shift tax processes online.

But what could a fully digital tax system look like? The tiny Baltic state of Estonia might provide some answers…

Why is Estonia heralded as a digital pioneer?    

With its medieval cities, fairy-tale forests and population of just 1.3m people, Estonia seems an unlikely contender for the world’s most advanced digital society. But ever since it regained independence from the Soviet Union in 1991, Estonia (or e-stonia, as it is often nicknamed) has been something of a tech trailblazer, spawning tech innovations such as Skype and TransferWise (now Wise), while also offering sophisticated online governmental services for its citizens.

Estonia’s public e-services have been around for nearly two decades (in 2000, it became the first country to pass legislation declaring access to the internet as a basic human right). Today, it’s resulted in the kind of digitised tax systems that HMRC can only dream of. In the UK, recent <Which> research showed it takes people an average of 2.5 hours to file their tax returns (one in ten people spend more than five hours doing the job). In Estonia, the whole process can take as little as three minutes. Even though 94% of all tax returns in the UK today are filed online, Estonia reached this figure back in 2007 (at the time, the take-up of online filing in the UK hovered around 7%).

Estonians don’t just file their taxes digitally: they can also vote online, access medical records (doctors are only allowed to issue electronic prescriptions) and can set up a company in under three hours. They can also use their smartphones to pay for bus tickets, parking and even buy a pint of beer. In fact, the only public service they can’t do from their laptops is get married or divorced (not unreasonably, they will need to leave the house for these tasks).

How do online taxes work in Estonia?

In Estonia, all it takes to file a tax return is a couple of mouse clicks. Using their ID card (see below), taxpayers log onto the e-Tax electronic tax filing system, which is part of the government’s ‘X-Road’ data-exchange platform. Here, they’ll find their tax return form, which is usually already completed for them.

This might sound Orwellian but is more collaborative in reality. The taxpayer’s salary and P45-equivalent details have been submitted by their employer, income and expenditure figures have been provided by their bank, while sick leave has been calculated thanks to their doctor and the digitised healthcare system logging how many sick days they’ve taken. 

After reviewing this information, the only thing the taxpayer needs to do is click on the confirmation button. The whole process can take as little as three minutes.

Filing taxes online has other advantages for consumers, such as receiving tax refunds within a fortnight (rather than several months if filed on paper).

The e-Tax system also allows individuals and businesses to declare social tax, pension contributions, VAT returns and customs declarations.

Accountants will need to be authorised in order to access their clients’ or company’s details on the system. But with all the data stored in one place, it will save them countless hours chasing clients for NI numbers or receipts for expenses.

What is the technology that makes processing taxes so easy in Estonia?

The X-Road is the backbone of e-stonia’s digital success story. By linking the nation’s public and private e-service information systems, the X-Road has become a one-stop repository that stores, shares and centralises data.

None of this would be possible without every Estonian possessing a digital identity (or ‘e-identity’). This is a mandatory digital ID card with an identification number and login code that enables them to access the country’s database of e-services. Users simply slot it into a card reader connected to their computer (or sign in via a Mobile-ID sim card on smartphones), which pairs their ‘e-identity’ with their digital signature. This can then be used to file taxes, sign documents, vote online, transfer money, plus access health records or any other information the state has on them. The ID card can be used as a ticket on some public transport, pick up prescriptions from the pharmacy, or as a travel ID when travelling within the EU.

Estonia was the world’s first country to use blockchain for governance (in 2012). Today, it uses a blockchain system that allows citizens to only input personal information just once (rather than entering their names/addresses into multiple forms).

How would an Estonia-style digital tax system benefit the UK?

Probably the biggest gain is efficiency. The Estonian government claims that by offering public services online, it saves the country more than 844 years of working time and 2% of its annual GDP.

It’s cost-effective too. The UK currently spends billions of pounds updating IT infrastructure for different departments/sectors such as NHS, HMRC and local authorities/councils, where data is often dispersed and atomised. Collating and storing this information in a central, blockchain-style database similar to X-Road can clearly result in significant savings.

However, it should be noted that Estonia is a country with a population over 50 times smaller than that of the UK. Rolling out such a tax system that spans so many departments in the UK could take many years.

Making Tax Digital for Income Tax webinar

Hear from HMRC on how you can prepare for MTD. Get insights straight from HMRC and software experts Sage, on how you can prepare for MTD for income tax and the requirements for digital links.

Register now

What cyber security and privacy issues are there with digitalised tax and government services?

Because the X-Road holds so much personal data, it throws up inevitable privacy issues. However, Estonians can choose which information is used by public services, while they also view whether organisations or individuals have tried to access their data.

Storing so much information digitally also makes Estonia vulnerable. Estonia’s X-Road system was severely tested in 2007 when it sustained massive cyber-attacks over a three-week period from Russian IP addresses. The cyber-siege brought parts of the system down, while banks, media, telecoms networks, email and government services all temporarily ground to a halt (many believed the attacks were orchestrated by the Russian government after a politically sensitive statue was removed in Estonia’s capital, Tallinn, but there’s no evidence to prove this).

The event shook Estonia up. The country has since established itself as one of the world’s leading cyber security authorities, setting up the Nato-funded Cooperative Cyber Defence Centre of Excellence in Tallinn. It’s also created the Cyber Defence League, a territorial army-style network of 100-or-so volunteers who are ready to take up battle stations at their computers should there be any future conflicts.

Christian Koch is an award-winning journalist/editor who has written for the Evening Standard, Sunday Times, Guardian, Telegraph, The Independent, Q, The Face and Metro. He's also written about business for Accounting Technician, 20 and Director, where he is contributing editor.

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