As digitalisation gathers pace, tax teams are going to have to become more assiduous. To date, accountancy teams have effectively marked their own homework. They’ve looked at the results, cross-checked any that seemed dubious, then submitted the return. That’s now about to change.
As we emerge from Lockdown, there’s going to be a renewed emphasis on compliance as the UK government seeks to close the tax gap further in order to address the increase in public debt resulting from support that the UK government has given to the economy during Covid-19. The Making Tax Digital (MTD) initiative will require businesses to evidence their workings in the event of an audit, but there are also other pressures to improve accuracy. Given that many are forecasting a recession, cashflow will need to be tightly monitored and controlled if the business is to survive, therefore the business will want to ensure accuracy in its compliance reporting.
Today, HMRC’s Central Risk team uses a variety of technologies to check Returns, such as its Connect data mining tool which is used to spot unusual activity or large discrepancies. Connect has bought HMRC good success on the personal tax side and now the regulator is bringing in agendas such as digital links to tackle other tax types where Connect wouldn’t be relevant. Under Budget 2020, HMRC was also promised 1,300 compliance officers and new technology to tackle the tax gap; extra muscle it will use to help enforce MTD compliance.
The digital links requirement changes things in that the HMRC audit will require the business to prove the calculation behind the values in the VAT Return. So, the onus is on the business to be able to demonstrate that the digital links exist and can be audited to prove the connection between the underlying transactional data and the generation of the Return.
How they do it in Spain
To understand what this might look like in practice, we can look at Spain’s VAT regime. Since 1 July 2017 certain tax payers, (large enterprises with over six million euros turnover per annum, businesses who participate in the special monthly VAT refund scheme (REDEME), or those that belong to a VAT Group), must keep electronic invoices and make an immediate electronic supply of information to the Spanish tax authority under the Suministro Immediato de Información (SII) live reporting requirement. They must file the required submissions within four days of the issue or receipt of the invoice. Failure to file on time can result in a fine of 0.5% of total invoice value and so this means that in practice such businesses tend to report daily.
From April 2020 the Spanish tax agency, Agencia Estatal de Administración Tributaria (AEAT) started to integrate SII with its VAT Returns process. The Modelo 303 Return is now prepopulated with the invoice information already reported via the SII platform. This effectively means error checks must be conducted as and when the invoice is generated, and so error checking must be embedded in the business as an automated process.
AEAT now has near real-time access to data at point of origin and as a result has been able to automate its auditing activity. Using cross-check controls, it can detect potential instances of VAT fraud and immediately request clarification. The business cannot then claim a VAT refund until the investigation is concluded and, should it be found to be at fault, could face a hefty fine of 1% of the error up to 6,000 euros quarterly. This initiative has successfully delivered on the AEAT ambition to close the tax gap as in 2017-2018 VAT collection from large enterprises grew by 3.4bn euros.
Implications for the UK
Whilst Spain doesn’t use digital links, it illustrates the transparency regulators are now looking to achieve. HMRC will use digital links to enforce compliance and reduce the tax gap associated with errors and mistakes. We have yet to see how the detail of an MTD audit will transpire, but during a recent ICAEW webinar, two thirds of those listening in thought scrutiny would increase in 2021.
So how can businesses prepare? As in Spain, compliance demands the implementation of specific technology, but here in the UK there’s been a lenient approach to the form that this can take. Provided the solution can both digitally submit and link source data through to the Return from April 2021, the business will be deemed compliant.
Being able to analyse VAT Returns for errors and anomalies provides a higher level of confidence in the figures being submitted. It gives the business added reassurance that the submission is correct and helps to reduce the likelihood of an investigation being triggered. Plus, it also reduces the time dedicated to the process. It’s for these reasons that ‘trend analysis’ is the feature we are most frequently asked about.
A form of data analytics, trend analysis provides complete visibility of the VAT Return, allowing businesses to detect unusual activity. By comparing and contrasting the current Return against historic submissions and period-on-period payments, it’s possible to automatically detect and flag deviations.
Whilst, data cleansing can highlight anomalies in the transaction data, further insight comes from data summaries, with period comparatives, showing the number of transactions contained in the VAT Return and any adjustments that have been made during the preparation process e.g. blocking VAT, excluding transactions, manual adjustments etc. Having been identified, these can then be reviewed and investigated, with further adjustments made if required.
Analytics takes all the guess work out of the equation, enabling the business to submit the VAT Return with confidence. Should it still be subjected to an audit, the business can also use this feature to verify its results and track back capabilities to determine exactly when and who made the calculation.
Our AlphaVAT compliance platform gives you comfort that the return is right. AlphaVAT now incorporates a data analytics dashboard that enables you to automate error detection in the same way as HMRC - by comparing current calculations with previous submissions. It ensures that you are not only MTD compliant, but also able to deal with any inconsistencies prior to filing and can answer any queries from HMRC post-filing. To find out how AlphaVAT can help you prove your compliance, go to our contact page today or call us on 01784 777 700.