The economic fallout from the coronavirus pandemic and HM Revenue & Customs’ Making Tax Digital initiative is accelerating the adoption of tax technology in a world where businesses must do more with less to comply and survive.
Companies tax functions need to accelerate the digital transformation of their processes to support coronavirus crisis management efforts and their organisation’s overall recovery from the pandemic. But sadly, many business owners are struggling to adopt and implement technology effectively to adhere to new reporting requirements and respond to the ever-evolving tax landscape.
“That readiness is critical now, with tax systems the focus of many of the comprehensive economic-relief packages introduced by more than 115 countries and jurisdictions since the World Health Organisation declared Covid-19 a pandemic on 11 March,” Kate Barton, EY global vice chair, tax, said in a blog post.
“Provisions range from shifting filing and payment deadlines for income and indirect taxes as well as regulatory filings to an abundance of broad and targeted tax relief measures, all designed to offer a lifeline to get companies and individuals through an unprecedented crisis. Yet they can only be useful if businesses have a clear line of sight across their operations to best claim help and make use of it.”
Making Tax Digital
In the UK, HM Revenue & Customs’ (HMRC) Making Tax Digital (MTD) initiative aims to make it easier for individuals and businesses to get their tax returns done by leveraging technology. As it stands, HMRC have introduced the MTD scheme for VAT, with businesses with a taxable turnover above the £85,000 threshold required to maintain digital records and use software to submit their VAT returns.
However, smaller businesses with taxable turnover below £85,000 will be required to follow MTD rules for their first tax return starting on or after April 2022. Furthermore, HMRC has earmarked start dates for quarterly digital reporting for income (April 6, 2023) and corporation tax (2026).
MTD has and will continue to drive businesses to adopt HMRC-compatible software to allow them to retain records digitally and link the outputs from those records to their tax filing which is submitted to the tax authority through an application programme interface (API).
“The whole idea behind MTD is to create a seamless digital journey for tax returns that reduces the human element by automating manual processes as much as possible in order to limit errors,” explains Helen Thornley, Technical Officer at the Association of Taxation Technicians (ATT).
However, according to a recent survey by the Chartered Institute of Taxation (CIOT) and the ATT, nearly 90 percent of respondents said that MTD for VAT had not reduced errors and that the cost of MTD compliance had far exceeded government estimates. Furthermore, only 14 percent of survey respondents said that there had been an increase in productivity in their organisation as a result of MTD for VAT.
“The results suggest there is a very long way to go to achieve the benefits claimed by the government about MTD for VAT,” Tina Riches, Chair of the joint CIOT and ATT Digitalisation and Agent Services Committee, said in a statement. “The government should undertake a detailed review of MTD for VAT, and determine any benefits, before rolling out MTD more widely.”
“Appropriate software can, when used properly and in accordance with a business’s needs, deliver significant benefits. But our survey demonstrates that MTD is not currently delivering those benefits to businesses, nor likely to reduce the tax gap.”
The digital link challenge
For many individuals and businesses, spreadsheet software remains popular. However, changes that are coming into force with MTD for VAT in April next year, along with income and corporation tax further down the pipe require greater levels of digital record keeping and linking of transactions. This leaves self-employed individuals and smaller businesses less able to rely on spreadsheets to the degree they have done for much longer, according to Adrian Hextall, director, tax technology team at Smith & Williamson.
“At the end of the day, Excel is a quick and easy modelling tool that everyone is familiar with and because it can perform mathematical calculations it allows business owners to pull a tax return together relatively easily,” explains Hextall. “But you lose the audit trail of those transactions very quickly in a spreadsheet.”
HMRC requires compliance with its second MTD mandate – digital links – meaning that the copying and pasting of data is no longer permitted and has led to a significant amount of confusion for business owners attempting to comply with the new rules. How this confusion is manifesting itself is evident in an HMRC forum held earlier this year.
“We download excel reports from our accounting software to use for the calculation. I understand that “cut and paste” and “copy and paste” are not acceptable digital links but is using the function in excel to right click on a tab on a sheet and choose “move or copy” and then picking “create a copy” in another workbook acceptable as a digital link as this is more of an automated function than a manual one?”
In response, HMRC said that the workaround would not constitute a digital link and that only a formula mirroring the data would be considered compliant. In summary, any manual input would break the digital link.
Thankfully, there is a myriad of MTD-compatible software options accessible for businesses of all shapes and sizes to choose from to enable a seamless end-to-end process. For businesses that still heavily rely on spreadsheets, there are vendors that offer “bridging software” solutions that make it possible to submit a VAT return via the MTD API without having to leave Excel.
“It is normally a lot cheaper to go down this route than to buy an all singing and all dancing package,” explains Emma Rawson, technical officer at ATT. “But for more larger, more complex businesses there are more expensive solutions that boast a suite of tools that incorporate advanced data analytics and forecasting to offer greater insight to management, auditors and regulators.”
Pandemic driving innovation
The digitalisation of tax was a priority for businesses prior to the pandemic, but the pandemic has served to accelerate investment in back-office functions that have traditionally been overlooked by management teams who often allocate technology spend to front-of-house operations. This is because tax departments are facing ever-growing demands on their time and resources in the current climate.
“Tax authorities and businesses have learned over the last nine months that highly manual processes pose a challenge when trying to deal with a crisis like the one created by the pandemic,” explains Jonathan Howe, UK tax operations and delivery leader at PwC. “Businesses don’t just need people in their tax department who can use technology, but those that understand the potential of these solutions in order to reshape existing tax.