The digitalisation of tax was underway well before COVID-19 struck but early indicators are that, far from destabilising adoption, the pandemic is now actively accelerating take-up. Automation tends to be triggered in bursts, but the cause can vary. The original catalyst can be thought of as the mandation of technology under the Making Tax Digital (MTD) initiative, but what we are now seeing is a second trigger in the form of the unprecedented upheaval and disruption caused by the lockdown.
There are two main drivers behind this. Firstly, we’ve all been forced to work with reduced resources under lockdown, revealing the importance of having technology we can rely upon. It’s made us much more aware of the value of collaborative tools like Zoom and Teams and has brought to the fore the need to have reliable, accessible processes which reduce risk. In the context of tax technology, we can expect to see more integration with third party tools to facilitate this type of working, while the software itself will address the risks associated with poor quality data, siloed information and human dependency to reduce the likelihood of errors, investigations and penalties.
It’s worth bearing in mind, too, that it’s not just the commercial sector that is tooling up. HMRC was promised 1,300 additional officers and new technology in the Budget; extra muscle it will no doubt seek to use to enforce compliance and close the tax gap to help lower the predicted national deficit of £337bn.
Technology also arms businesses with a wider range of capabilities, more agility and a lower cost base, which leads us on to our second driver: cost. Businesses are now aggressively protecting their cashflow and it’s become more pressing than ever to “do more with less”. Many now recognise the way to reduce costs is to tackle the inefficiency associated with the bloated manual processes used to calculate and correct tax. Our recent survey corroborates this, revealing that 51% of respondents think automation improves accuracy, 44% think it improves data quality and 38% think that it frees up staff, while 28% could see it generating cost savings.
This second driver is also linked to an anticipated recession and when that happens, we can expect to see a restructuring in the jobs market. Thankfully, tax professionals stand to gain in this scenario as it’s their knowledge that is of most value. Automating the more mundane elements of their jobs will allow them to spend more time collaboratively delivering strategic insights to the leadership team, for instance, thereby increasing their contribution to the business. Technology can help facilitate this through the alignment of planning and forecasting and inter-departmental reporting.
So, why has it taken a series of mandations and the prospect of a recession to transform the tax sector? Old habits tend to die hard and a reluctance to embrace the new has seen tax lag behind the curve of, say, the FinTech industry. Before MTD, indirect tax was regarded as a sunk cost. There simply wasn’t the impetus to change existing processes and so spreadsheet-based processes continued to dominate, and with them came problems, such as broken macros, incorrect formulas and mismanagement. This saw other associated issues also persist, such as poor source data, leading to quality control issues that made it very difficult to track and trace errors. As a result, the tax professional’s time has been monopolised by gathering, verifying and checking data.
It wasn’t until 2019 that we saw tax processes begin to change, kick-started by MTD, but this is really only the beginning. MTD sets us on a path to automation and the creation of a ‘single source of truth’ or truly reliable data that can be used to prove compliance. While HMRC has stopped short of demanding supplementary data for now, the likelihood is it may well follow in the footsteps of other tax authorities in demanding greater transparency. At that point it will no longer be enough to get your homework right, you’ll need to show your workings.
We’re now seeing businesses coming under pressure to create more reliable processes that can stand up to that kind of scrutiny. Being able to pinpoint precisely when and how a calculation was made is likely to become vital as regulatory demands increase. So the business needs to be able to conduct data analysis, highlighting errors or exceptions in source data, and to be able to timestamp adjustments and calculations so that these can be used as evidence in a digital audit trail.
The new normal
Right now, we’re currently in a period of hiatus, with the digital links aspect of MTD moved back to April 2021. The danger is that businesses that fail to use this time to review their digitalisation plans risk being saddled with systems that are not specifically designed for a digital environment. In contrast, those that take a longer-term view by embracing a ‘digital first’ approach and integrating their systems will be better positioned to handle future legislative requirements.
When markets do settle into a ‘new normal’, we can expect technology to play a far greater role than it has previously in the tax sector. Businesses will invest in order to protect their cashflow and HMRC will continue to accelerate the digitalisation of tax regimes. Those who don’t keep pace will inevitably find they have to work harder to prove their compliance, devoting even more time and spend to the process, while those who do transform will be able to harness their data. Rather than taking a rear-view mirror approach, they’ll be able to rely on their data and use their human resources to become more forward facing.
To find out more about how the COVID-19 crisis has impacted tax, sign-up for our ‘Tax Automation and the Lockdown’ webinar.