Making Tax Digital is the call to arms that tax functions have been waiting for. It's time to make it happen!
As is often the case with any modernisation, some sections of the tax community have voiced concerns that Making Tax digital (MTD) is an unnecessary additional reporting requirement and will only add to tax return-induced stress. These concerns ignore the reality that the changes are reflective of the unavoidable global digitalisation of tax, which offers significant and unique opportunities for a modern and progressive tax function to drive a step-change in how they work and use data. Undoubtedly doing nothing is no longer an option!
What is MTD and what are HMRC’s longer term objectives?
MTD is the requirement for all businesses, unless specifically exempted, to keep their records in a digital format. HMRC wants to be one of the most digitally advanced tax administrations in the world – improving efficiency, effectiveness and ease of compliance. The plans signal the end of paper accounting for millions across the UK and their replacement by electronic filing via Application Program Interface (API) – a set of routines, protocols, and tools for building software applications) – initially only for the “9 box” VAT return, but later to include additional information on adjustments and source data, before being extended to other areas of taxation in due course.
How will VAT information be provided to HMRC post MTD go live?
MTD requires a digital link between the source records and HMRC by way of either direct submission from business accounting software, via specially configured spreadsheets, or via some form of bridging software. There are therefore a number of approaches which will be acceptable to HMRC – the right one for you will not necessarily be the same as for others and will depend on your existing data, systems and VAT return process. When deciding which approach to adopt, it’s important to consider not only these initial VAT requirements, but also likely future additional VAT MTD requirements and those likely to be put in place for other taxes.
A broader trend in tax towards digitalisation
There has been a significant degree of resistance to MTD in some quarters with terms like “unleashed” and “inflicted” inferring the occurrence of a disaster-level of event. Yes, MTD is a significant change in the way HMRC wants VAT registered businesses to remain compliant, but the reality is that MTD is merely part of a much wider and longer term trend involving the global digitalisation of tax. This trend – rather than be feared and resented – should be embraced for what it offers: a unique opportunity for the modern day tax function to capitalise on recent technological advancements and gain real visibility and control over its data and processes.
Many tax authorities are collecting more data, in more detail, more often. They are using this to benchmark taxpayers against each other, across taxes and countries and are starting to become aware of the value from using that data. Indeed, some tax authorities are in fact creating new taxes using data and analytics as the bases, which is itself is a significant change from the “traditional” way of drafting tax legislation – such examples can be found in the way several Asian and Middle Eastern jurisdictions have chosen to build their VAT and equivalent tax regimes.
In short, mastery of data, process and controls is no longer a “nice to have” for the tax function – the modern tax function simply cannot ignore this trend therefore if they wish to remain fully compliant.
Tax authorities and digitalisation
The attempt to stigmatise MTD as an unfair, extreme and unnecessary imposition, also conveniently ignores the fact that it’s by no means the first such undertaking of its nature in the world and arguably less onerous than its peers.
HMRC’s initial impact assessment estimated one-off transactional costs of £280 per business as a result of MTD, but we have yet to see how this estimate was arrived at. To start with at least, HMRC has been relatively flexible regarding how taxpayers meet the requirements of MTD compared to other tax authorities who have requested direct access into source accounting systems and more detailed, transactional level, submissions.
Furthermore, this trend has been over 20 years in the making with, for example, IXBRL filing having been mandatory for a decade. HMRC is also not alone in commencing their move to total digitalisation via VAT. Because it is a transactional tax, VAT is an ideal starting point for HMRC to test its own submission systems and data management before moving on to other types of taxes.
There has also been a significant trend for tax authorities to move towards real-time or near real-time data submissions with increased requirements for more detailed data submissions to support “traditional” returns. For example, Brazil has continued to increase the level of regular data submissions a company must make – a move reflected by the likes of Poland, Bulgaria and Romania. The message is clear, the shift towards digitalisation across the global tax spectrum is well underway and MTD is just part of that general shift. This is part of a deliberate move to “digitise” taxpayers in an attempt to minimise the shadow economy which operates using cash. From a tax authority perspective, the more taxpayers can interact via systems, the more they can be treated as “official” – taken to its logical conclusion is the idea that those who don’t participate in this “new” economy with digital records, and who seek to operate “offline” to avoid tax simply won’t be able to participate. Obviously this needs to be simple and cost effective for the taxpayer, but this idea of a “certainty for transparency” exchange is clearly a long-term trend.
The benefits to the modern day tax function
The tax function has similarly witnessed ongoing change over the past couple of decades with the rise of outsourcing, low cost service centres, “centres of excellence” and now with technology. Similarly, the rise of on-shoring and automation is just another step in the evolution of the modern tax function. This evolution is now having a sizeable impact on how tax functions work and how they interact with other stakeholders, including the wider business, advisers and tax authorities.
Simultaneously, tax has never been more high profile among boards and the external media (with tax regularly on the front page of newspapers). So there is real value from doing the right thing and – more importantly – being seen to do so.
At the same time there is also increasing pressure to do more with less resources and respond to the increasing need for “real time” risk management across the business brought about by increasing business and operating model complexity. With MTD a reality, and the volume of data exponentially increasing all the time, it’s becoming less realistic to simply rely on periodic reviews of data and calculations as part of a return submission cycle; the need for tax to have more of a “real time” grasp of data is ever more important.
With so many stakeholders to please and so much complexity, harnessing technology and becoming a “master” of available data becomes a “must-have”, no longer a “nice to have” for tax functions. It will be increasingly important for business to understand the story that their increased data sharing is telling tax authorities before they share it.
However, this step change in how tax works – from periodic return filer to “real time” guardian of risk is exactly the type of change that tax has been craving for years as it offers the opportunity for tax to move right from the end of the “business process lifecycle” to near the beginning.
As such, rather than brand MTD an unnecessary encumbrance, we would urge accountants and businesses to embrace the digital approach to tax as a huge opportunity to become masters of their data and more integrated with the businesses within which they work. Digitalisation might very well be “the Kodak moment” for the tax function. In the 1970s it was the photography giant who had pioneered the development of digital cameras and photos, but it never fully embraced its own vision – partly due to a fear it would threaten its own photographic film business. The end result of this failure to embrace the future was catastrophic as rivals rushed to displace Kodak as the market leader.
This wider trend also need not be dreaded by heads of tax. Rather they should embrace it as the massive opportunity it is to capture step-change in the way they access and use their data, with limitless opportunities offered from automated processes, proactive risk management, intuitive data analytics, real-time analysis and reaction capability. This can lead to opportunities to increase efficiency, standardise processes, reduce risk, enable more proactive tracking and in short move the modern tax function from being an end-user of data to one which is centrally and critically involved with day-to-day business decision and has the time to do that because lower value tasks are automated.
This brave future previously was just a dream for any head of tax and only realisable as part of a broader programme of finance or system transformation. MTD fundamentally changes the needs and prominence of the tax function within the wider business and puts tax at the centre of decision making and risk management.
Luckily, these changing requirements and opportunities come at a time of significant and sustained improvements in the capabilities of technology. Not a week goes by without an article on “robotics” and “artificial intelligence” in the press, but the reality is that technology has been evolving at a similar pace for decades – it’s just not impacted the world of tax until relatively recently. The previous two decades have seen huge progress and increase in computing capacity and technology. This has been matched by as significant a change in how society interacts with technology (e.g. the omnipresence of tablets, smart phones and Wi-Fi connectivity).
At the same time, we have also witnessed a significant step change in how technology works which has led to it becoming far more intuitive and accessible to “non-IT” people. This means there is a real opportunity to use technology to meet these ever-increasing tax compliance requirements in a way that wasn’t available before. In short, where five years ago we might have referred to “tax technology”, we now talk about simply using technology for tax – true, the need for specialist ways to capture and hold tax logic are needed, but they can be integrated into existing systems in a manner much more flexibly than was previously possible – in part using the same approach (APIs) that HMRC is using for MTD and also made possible by the increasing use of cloud-based computing.
Clearly therefore, MTD is by no means an end-point in the relationship between technology and tax. The increasing activity and value of cryptocurrencies, for example, will push the need for even further technology advancement in the tax function (with current compliance reporting soon to become totally ineffectual). Cryptocurrencies use encryption technology (cryptography) in its creation in order to ensure the security of transactions but also prevent the creation of additional units. Once purchased, cryptocurrencies are held within a “wallet” which holds the currency but also allows the owner to spend the currency. Without a hard copy audit trail, the need for improved data analytics increases further – along with the need for artificial intelligence as a control mechanism.
Perhaps the most well-known example of this is the currency Bitcoin built using blockchain. In time, blockchain may become the norm for business accounting, effectively turning traditional “double entry bookkeeping” to “triple entry bookkeeping” – with records in the vendors and purchases systems and a third unique transaction record created in real time and held separately. Taking this thought further, tax authorities could levy (and potentially collect) tax at the point the transaction is posted, rather than having to wait for a return and payment. Under this scenario, the tax return may become more of a tax “true up” and claim for overpaid tax to be refunded back from HMRC than the other way around. All of which is undoubtedly very much in the future, but hopefully serves to illustrate why HMRC and other tax authorities are moving in this direction.
So there are clear opportunities here, but where is it best to start?
We would recommend that the best starting point is simply to try something rather than try to do everything. The “something” you consider first may be directly linked to the new HMRC MTD requirements, might be focused on a process which takes a significant amount of time, an area of key risk or by change occurring elsewhere in the business (e.g. a finance transformation or new ERP system). How you address that “something” will be shaped as much by your existing systems, IT and data as it will be by the issue itself – but we typically find that a significant portion of any given tax process or risk can be addressed using systems already existing within the business.
A key starting point is that systems and data are merely enablers to driving the operational change, or addressing the operational issue that you have identified – therefore it’s always best to focus on the process or issue first, rather than start with a technology and think about how you might be able to use it.
The classic “build, buy or configure” decision is still there, but it’s no longer necessarily an “either/or” choice – all the major tax software providers, for example, are rebuilding their platforms to make them more flexible and to make it easier to choose individual components which are then integrated with other systems, rather than requiring the customer to purchase an entire tax “ecosystem”.
An approach which identifies “something” to solve and shows how technology and use of data could solve it is key not only to proving the potential value but also to convincing stakeholders that there is a broader opportunity for tax – from an efficiency, risk and integration perspective. In addition to being a mandatory journey for tax to embark upon, it’s also a journey for which the business already potentially has an armory of weapons (in the form of existing IT systems) – meaning a large scale IT project isn’t necessarily required. As such, by solving one “something” to start with you not only show some benefit but also have a blueprint for which many other tax (and finance) related issues could be addressed in a consistent manner.
The call to action is now – MTD is the call to arms tax functions have been waiting for to show the value they can add to the business – let’s make it happen!
This article was written by Andrew Burman, partner at Grant Thornton, and Gareth Vaughan, manager at Grant Thornton, in partnership with AJ Chambers, the UK’s leading public practice employment consultancy.