Ambitions for Making Tax Digital (MTD) indicate a future where a common set of data will form the basis for all tax computations. Gone will be the days of completing each tax individually from scratch. This simply won’t be possible as we move towards near real-time reporting.
Tax teams will need to be able to access more data, more frequently and to perform more submissions. But drawing down that data multiple times will be inefficient. Instead, there needs to be either a one-touch or automated drawdown that creates a ‘single source of truth’: a reliable set of source data that can then be repurposed for any tax.
Appetite for change
We can already see evidence for this as outlined in the government’s ten year tax strategy and more recently in the MTD for Corporation Tax (MTD for CT) consultation. The regime is being systematically digitalised and will share some common mechanisms.
Digital records and digital links are both in scope for both MTD for VAT and MTD for CT, as is quarterly reporting. Plus the proposals suggest MTD for CT may also align with the reporting of statutory accounts, a move expected to improve the quality of iXBRL tagging, giving HMRC access to better information.
But it’s not just HMRC that is driving this demand for data. Tax teams too will want to be able to access and use data more readily. A common request we hear is whether it’s possible to perform a period-on-period comparison, for instance, which can give the team some comfort that things are moving in the right direction. This is why we’re now seeing a growing demand for data analytics, insights and forecasting, and just as with HMRC, this appetite is driven by the desire to reduce risk and increase accuracy.
So what will this mean for tax technology? Expect to see the emergence of tax platforms that can deal with all aspects of the process, from data cleansing to data management and insights. Data will be extracted, transformed and loaded (ETL) from sources (ERP, accounting software, legacy systems) and used to fulfil obligations for multiple taxes (VAT, CT, statutory accounts, CbCR etc) without the need to go back to the source data.
To borrow an analogy from a business we partner with, the architecture will resemble a burger, with the two buns spanning the tax functions required globally while the filling varies according to your jurisdiction:
- Top bun – Tax Data – how we get the data in
So how the data is extracted from source systems and transformed and loaded to create a common data pool. Dataflow will increase under MTD so automation is essential to counter that, otherwise workloads will rise. This top bun uses generic ETL technology which is not specific to tax but which can pull the data out using spreadsheets or APIs and centralise it.
- Garnish – Tax Operations – how we manage the data-driven tax function
Managing and controlling data in order to mitigate risk ie SAO and BRR+. Oversight and governance are increasingly important as teams seek to create a watertight process. It’s no longer just about the numbers but the care of the data and auxiliary information that goes around those numbers.
- Burger – Tax Applications – how we perform calculations
Carrying out the actual calculations required for Returns. In-country tax logic is now so complex that until recently a different best-of-breed solution is required for each jurisdiction but with one platform it will be possible to meet the reporting obligations for each distinct tax from one set of data.
- Bottom bun – Insights – how we use the data to generate business intelligence
Again, this is generic technology that isn’t specific to tax. It uses visualisation software that can plug-in to existing processes enabling the user to glean insights from the data. If you look at the data that is in a CT Return that information is rich because its post-process; it’s the only place you can go to see how much you can claim on R&D tax credits, for example. If you put reporting around that you can elevate and use that, turning compliance into insight.
The addition of ETL technology at the back end and Business Intelligence software to the front end are now possible because these technologies have become more widely available, have reduced in cost and are now more intuitive to use. It’s a fusion that I believe will continue, as we see tax technology adopt proven techniques that enhance the process still further.
More food for thought
So what might be coming down the line? We’re still very much in early adopter territory when it comes to next generation technology such as Machine Learning and Artificial Intelligence (AI). They’re terms that tend to get banded about quite loosely and many would argue we’ve yet to see true AI used widely in tax. But if you consider the traditional technology adoption curve, it feels to me that we’re only a few years away from a real ramp-up in this space because machine learning is now enjoying widespread adoption in other areas of business.
The other area we get asked a lot about is Robotic Process Automation (RPA) which has the ability to automate tasks. There are lots of great RPA tools out there and they can definitely cut time out of the process RPA is seeing some uptake, and we can expect it to feature heavily in the short-term in tax.
In addition, we are seeing strong demand for API-driven architecture. People want tax technology that can ‘play nicely’ with or interact with other systems i.e by pulling and pushing data, sharing reporting, etc. Transformation has ripped through businesses, seeing finance systems overhauled, for example, and there’s now a growing need for tax technology to be able to use APIs to integrate with these new shiny systems as well as being backwards compatible with legacy systems.
Regulation and technology are digitalising processes that have remained unchanged for decades but the core reason for doing so is to improve accuracy. Both HMRC and tax teams want to improve the accuracy of and their confidence in the numbers. To achieve this, the flow of data must increase to enable more frequent reporting but this then generates more data and more often, ramping up workloads.
MTD won’t reduce workloads but technology can. By looking at how we automate the process, and not being blindsided by the speed advantages associated with RPA, we can critically analyse how tax technology can be designed in such a way that it creates an efficient pipeline. A source agnostic platform can use ETL to capture the data, mapping can identify and filter data, calculations can be analysed and reviewed, and insights derived from a reporting process that was previously only used for compliance.
If you would like to know more about our vision of the future, why not take a look at the ICAEW webinar ‘What to look out for in tax technology in 2021’ or read our ‘View of the future’ blog series based on our recent conference: