We’ve seen the ‘first cab out of the rank’ in the form of MTD for VAT but what does the future hold as we move along the trajectory set by HMRC in its ten year plan for a modern tax administration towards a digital tax regime? That was the focus of a recent ICAEW webinar which posed the question ‘A digital future for corporation tax?’, co-presented by David Lyford-Smith, Technical Manager for the ICAEW and myself in which we looked at the impact of changing working practices, regulatory pressures and the evolving tax function.
How work is changing
Technology has seen attitudes and working practices change. Not so long ago there was a binary tax operating model of insource or outsource but as tax processes have become more digitalised, we’re seeing more hybrid co-sourcing models emerge, whereby the business does some of the processing itself, perhaps prepares an initial draft, before consulting an adviser. This means corporations are able to reduce spend but also improve the quality of the information they receive because advisers are no longer spending vast tracts of time collecting and crunching the numbers; instead they can offer their clients valuable advice.
We’re now much more ready to embrace other ways of working which is why Cisco estimates 95% of workloads will be handled in the Cloud this year but tax remains behind the curve. Tax is a process ripe for automation within the business but it has lagged behind the finance function in terms of digital transformation because it’s been hard to justify investment but this is now changing with the expectation being that digitalisation is a matter of ‘when not if’.
Drivers of digitalisation
HMRC is now under even more pressure to increase its compliance yield. The pandemic has seen all tax revenues decline, with the exception of tobacco, meaning it must reduce the tax gap still further. That means tackling the biggest cause of ‘failure to take reasonable care’ by increasing accuracy and the only way that can happen is through reducing the potential for human error. That was, of course, a primary driver with MTD for VAT as well as increasing transparency. But for the business this all equates to an increase in expectations and obligations and this has helped catapult tax from being a siloed back-office process to a boardroom issue.
There’s now a much greater appreciation of the role of tax within the business and the need to make it more efficient and productive. We’re seeing much more demand for additional functionality that goes beyond the capabilities of the humble spreadsheet, such as analytics and data visualisation and Power BI is now being used in a tax context. Businesses want to take a deeper dive into their data to ensure they are claiming all of the tax reliefs they are entitled to, such as R&D relief across their entities.
Traditionally, the finance function spent most of its time processing transactions and reporting leaving little opportunity for reflection but now these working practices are being inverted. PWC found those businesses topping the performance leagues were ‘flipping the pyramid on its head’ and were focusing over half their efforts on deriving insight. So how are they doing this? According to McKinsey between 30-40% of most finance functions can be automated. By automating compliance reporting, these companies are able to free up the time to spend on analysis.
On the horizon: MTD for CT
The proposals outlined in HMRC’s consultation for MTD for corporation tax reveal there are quite a few changes in the pipeline so it would be wise to bear these in mind today rather than wait until 2024 and mandation in 2026. We can expect to see digital records and digital links included but these are likely to be more of a material change under CT which is a far more manual process. Other big changes include the extension of quarterly submissions to all, up to 28 categories of income and expenditure, and the possible movement in filing dates that could see the CT return brought forward to coincide with the filing of the statutory accounts. That could be interesting given that many people use the latter to inform their CT computation.
What this means in effect is that there will be a whole lot more going on. Quarterly reporting, a review and the final annual reporting and true-up could see six stages to the process. Then you’ve got the reduced timescales and the possible conflicts with other filing deadlines. So this could potentially be highly intensive for the business. But it’s easy to see why HMRC wants to go down this path. Today, the tax authority doesn’t have sight of the profits made in the first quarter for up to 18 months so it needs to get that data sooner to be able to perform an intervention. The tax authority also wants to improve the quality of the iXBRL data it receives from SME businesses which typically just cover 10-11 categories tax and so this data is of limited (some would say no) use.
What the future might look like
Today, corporation tax and VAT are siloed processes. Data is extracted from ERP systems multiple times, there are numerous Excel workbooks and other accountancy systems. There are separate processes for corporation tax provisioning for both transfer pricing and for statutory accounts. And each stage of the process is handled separately, from data collection, to preparation to review.
But under MTD both taxes will impact one another far more. For instance, if you’re preparing a quarterly corporation tax return in which there is an error but don’t spot this until you come to file, you’ll only have a very small remediation window, maybe as small as seven days, and you’ll also need to ensure any changes are made to the VAT return. Scale that up (some businesses have tens or hundreds of entities) and you begin to see how filing could become much more constricted and complex than it is today and why automation will be an essential part of making the reforms work.
The OECD has done some interesting work looking at the way tax administrations are evolving. It refers to the coming age as Tax Administration 3.0 and expects to see tax processes built into accounting systems so that transactions, reporting and reviewing will all take place within one system. So it’s the ‘single source of truth concept’ which sees data pulled in once, fed into calculations then reviewed and signed off.
Layered over the top of this, we expect to see a tax operations function which will allow the business to manage and control its risk, and ensure compliance with SAO, all of which is automatically documented. We’ve already seen HMRC issue a consultation exploring an increase the documentation associated with transfer pricing so the direction of travel is definitely towards more detailed reporting. Having that housed in one place and centrally accessible, with digitally signed approvals, has to be the way this is going.
Your digital journey
Today, businesses are at different waypoints on their path towards this digital future. We polled the audience to find out what stage they are at and found 60% were using MTD for VAT as a springboard to justify further investment in the build out of their digital processes.
Some are just beginning, perhaps they are using software to map data from their trial balance to the General Ledger. Some are at the stage where they are bringing in custom data checks to look for specific data. Others are embarking on the direct integration of tax software with their ERP systems whereas others are now using AI to flag transactions and perform automated mapping. Data analysis is also becoming more ambitious. Rather than simply looking at the entities within the business, tax teams will be able to compare their tax posture to other businesses operating within the same sector to ascertain if they are over or under claiming.
But getting to this point will take lots of tiny process improvements. It all begins with looking at inverting the pyramid, freeing up time which then creates accuracy and efficiency gains. So just using automation to save three days on Task X and five days on Task Y can make a tremendous difference.
If you’d like to explore how you can begin to hone your processes or are still reviewing your MTD for VAT compliance options, why not sign up for a one-to-one consultation with us. Or to find out more about how you can use HMRC’s digital plan to help justify investment in the tax function, check out our MTD – Making Tax Deliver webinar. Finally, if you’d like to catch up on the ICAEW webinar where we discussed these issues in depth, you can view the video here.