A key part of HMRC’s vision for a modern tax administration is to “drive up levels of innovation and productivity”. That applies both technologically to software vendors, as they seek to improve the functionality of their systems, and to businesses and accountancy firms, as they use those systems to create more efficient and accurate workflows. But getting there could require rapid change from 2023 onward which could prove costly and disruptive unless organisations start to look at their processes in the near term.
Initially, we can expect more emphasis on reporting transparency and increased accuracy, with the standardisation of the collection, processing and submission of data. This is because HMRC is keen to improve its understanding of what’s going on under the tax hood and wishes to be able to pre-emptive action to lower the incidence of incorrect returns. This data will then help the tax authority know when to carry out an intervention which will hopefully increase the compliance yield. (HMRC is under considerable pressure to reduce the £31bn tax gap, especially given that taxes coming into the treasury have declined during the pandemic).
Yet businesses are also realising that digitalising their tax processes can provide them with immediate gains. These include significant time savings, fewer errors and more time to carry out data analysis and tax planning.
In our latest survey with Accountancy Age, we found a third spent over 25 days a year on VAT reporting while 19% spent over 50 days and 64% wanted to reduce compliance workloads using automation. Accuracy was also a concern, with 57% admitting they accepted errors in their VAT reporting with nearly half said they wanted to use automation to eradicate errors. And over a quarter wanted to use data analytics to compare data and look at potential eligibility for other tax claims and reliefs.
When it came to dealing with complex VAT such as partial exemption, 80 percent wanted to automate these processes over the next five years, irrespective of any regulatory compunction to do so, revealing that digitalisation is no longer being predominantly driven by compliance.
Another key takeaway from the report and one of the inevitable implications of HMRC’s reforms is that spreadsheets are likely to play a lesser role in reporting in the future, with dedicated tax technology coming to the fore.
So how can you begin to build out your digital tax processes?
One: Get on top of your data
When drawing data from multiple sources, such as accountancy systems and ERPs, you need to be able to verify the integrity of that data and be so confident in it that it can be used to fulfil multiple tax obligations. In order to get to this stage, you’ll need to look at mechanisms that allow you to detect and remedy any potential issues. Error and anomaly detection can alert you to these by searching the system for discrepancies. Standard checks can be used to look for duplicate transactions or unusual VAT rates, for instance, or you can customise the search terms. This will allow you to specify your criteria and take corrective action, perhaps to identify VAT on tax codes where there shouldn’t be any or to flag supplies that have been given an incorrect VAT treatment. On the plus side, automating error detection in this way improves confidence in figures and shortens preparation and review times.
Two: Automation is the key to greater accuracy
To ensure improve accuracy for digital audits, you’ll should look at automating the calculations you carry out. This can significantly reduce the risk of error particularly if your business uses complex VAT processes such as VAT groups or partial exemption standard or special method. You can also easily use this to apply adjustments and block/exclude transactions as well as to generate calculation reports.
Three: Be prepared to prove your workings
As HMRC begins to clamp down on compliance it’s going to fall to businesses to demonstrate they’ve done everything they can to ensure their workings are correct. You’ll need to be able to go back through your VAT process, possibly even back to the transaction level, which can be like looking for a needle in a haystack. In contrast, a VAT process that uses a digital tax engine can see all stages of the process time stamped, recording when and where changes were made. This digital audit trail means you can quickly respond to any queries from HMRC.
Four: Mine your own tax data for useful insights
It’s not just HMRC that stands to benefit from more information. Analysing your own tax data can provide you with a wealth of information. You can view and compare historic and current Return periods. Compare period-on-period transactions. Use trend analysis to determine future liabilities. Make commercial decisions. Even use gap analysis to determine if you are claiming all the tax reliefs you are entitled to. During a recent poll on an ICAEW webinar we found 75% of the audience would implement tax analytics this year if they could.
Five: Brace yourself for further change
The government has warned that it intends to make “substantive progress” in reforming the tax regime over the next few years and will lay the foundations for further reforms leading up to 2030. That means we can expect more regulatory hoops to jump through and so you’ll need to make sure you can meet these demands. If you go down the technology route, ascertain the level of support you can expect from vendors and how and when they issue updates or if you’ll be left fending for yourself.
Digital tax platforms such as our AlphaVAT solution could help you meet these challenges and prepare for further regulatory demands by digitally managing your entire VAT compliance cycle. To find out how technology could futureproof your VAT process, feel free to join our A Guide to Digitalising VAT webinar or if you want to know how to automate complex VAT, why not sign up for our Digitalising PESM webinar.