In this first part of a six part series (1/6), in conjunction with Tax Journal magazine, we look at the current mood among businesses towards Making Tax Digital for VAT, the appetite for automation, and the benefits a longer term strategy can bring.
Tax reforms ushered in under Making Tax Digital for VAT (MTDfV) have yet to be embraced by many despite the looming initial deadline of 1 April 2019. An industry survey by Thomson Reuters found that 70 percent had yet to implement MTDfV plans, while 37 percent had decided to avoid changing policies until further information was forthcoming about the October deferral (applying to “businesses with more complex requirements”). This suggests a lack of confidence about the process and software solutions on offer.
Irresolution could lead to businesses investing in a short-term, basic MTD compliance solution rather than taking a fully considered approach. This would jeopardise the wider benefits envisaged in the recent report by the House of Lords Economic Affairs Committee which concluded that tax transformation should be motivated by “productivity, efficiency and modernisation reasons rather than just tax compliance”.
MTD in context
In the UK, MTDfV is a continuation of the wider global movement, fuelled by OECD initiatives such as BEPS CbCR and CRS, towards digital tax compliance. This is driven by the tax authorities’ desire to harness technology to close the “Tax Gaps” by reducing errors, mistakes, avoidance and evasion. Digital compliance with, in the case of some jurisdictions, near or real-time reporting of transactions, is providing regulators with the underlying digital data to support electronic audits and data analytics.
So, whilst MTDfV currently imposes no additional reporting beyond the VAT return, one must remember that this is just the starting point. HMRC are modernising their systems and may well follow the example of tax authorities in countries such as Spain, Poland and Brazil and extend the MTDfV requirements to include the provision of electronic transaction data, enabling HMRC to electronically audit the underlying data and perform data analysis.
Increased compliance obligations are taking their toll on businesses. They’ve exposed the inadequacy of existing manual processes and the difficulty in dealing with greater reporting workloads. CFOs are under increasing pressure to ‘do more with less’. As a result, there has been a gradual shift away from manual processes towards technology but adoption has been piecemeal. MTD is a disruptor that will change this, setting a minimum bar for digital transformation across the industry.
If we look at the key drivers facing the tax department (see below) as identified in the Tax Systems Customer Survey 2018, it’s clear that MTD is not the principle motivating factor. The top catalysts were: increased obligations resulting in greater compliance workloads; greater transparency around reporting and efficiency when dealing with HMRC queries; and, greater internal control and tax governance.
However, by utilising the opportunity that MTD brings, the tax department could secure further funding for new systems and processes. Automating the end-to-end compliance process from the collection and management of financial data through to the creation and submission of computations will deliver real business benefits and should assist the team in dealing more efficiently and effectively with demands.