In a discussion paper published today (January 17), the OTS suggested technology had the potential to create a tax system where taxpayers need only "press a button" to meet tax obligations.
But the paper warned with these advances come the risk taxpayers may become disengaged with their own tax affairs, leading to problems with culpability in the event of errors.
The OTS offered the example of self-driving cars, asking the question of who was responsible between the owner, passenger, manufacturer or software developer should the vehicle be involved in an accident.
The report read: "Similarly, if a tax compliance process is largely automated and therefore out of the hands of the individual taxpayer or business owner, does responsibility rest with the taxpayer, the software developer, HMRC or someone else?
"Who should take responsibility or is it shared?"
The OTS added: "The exchequer may lose out if taxpayer activity falls outside of an established technological process to record and account for tax, while the taxpayer may lose out if they do not fully understand their obligations, and do not possess the knowledge to challenge any tax assessment made by HMRC."
The OTS warned neither of these scenarios could be considered as "progressive" in terms of tax simplicity and encouraged the government to consider the issue "in more depth".
The paper also suggested the government closely monitored technological innovation in the private sector, using it to improve taxpayers’ experience of managing their tax affairs in the public sector and ensuring the two were "aligned".
The OTS recommended HMRC and software developers continued to work closely together, to ensure "products are developed which meet customer needs".
It advised, in principle, that it welcomes HM Revenue and Customs’ Making Tax Digital project, agreeing there was potential for digital integration to make tax simpler for taxpayers.
But it added to ensure a smooth transition, taxpayers should be given sufficient information and time to move into the new regime.
HMRC first published its plans for the Making Tax Digital project in 2016, claiming it would mark "the end of the tax return" by 2020.
Paul Morton, tax director at OTS, said: "Technology has transformed much of our day to day lives, in some areas almost beyond recognition.
"Although many tax-related activities have benefited from a digital approach we are still at the early stages of the potential transformation.
"This paper explores some of the more difficult questions that new technology presents. It is important that some of these areas are addressed sooner rather than later and we hope our paper will encourage this."
The OTS is currently reviewing the inheritance tax system with a view to making it simpler, after being asked by the Chancellor to do so last year.
Chancellor Phillip Hammond said last January he was concerned the system was "particularly complex".
In an interim report out in November, the OTS recommended the government should move to a fully digital system for inheritance tax.
Rachael Griffin, tax and financial planning expert at Quilter, said: "Simplification seems to be a buzzword in government these days, between ISA simplification, IHT simplification and now tax simplification through technology.
"This is no bad thing as layer upon layer of tax changes over the past number of years has built a cake that is verging on toppling over. However, the crucial element here is that all the simplification initiatives join up and do not add yet another complex layer.
"As the OTS acknowledges, technology is a double-edged sword as it presents opportunities to make life easier but also comes with risks. It is therefore encouraging they are continuing to review the impact, particularly on vulnerable customers."
rachel.addison@ft.com
