We’re all aware of what constitutes poor VAT reporting – labour intensive data collection, manual calculations, and late or last-minute filing all of which can see the risk of error increase – but what does good look like? As we move towards the realisation of HMRC’s vision for a modern tax administration, there’s a pressing need to establish what effective VAT reporting is and what we should be aiming for when transforming the tax function.
What’s driving change?
We’ve seen the adoption of technology grow exponentially, with Cisco estimating that 95% of workloads will be processed by cloud technologies during the course of 2021 while collaborative technologies such as Microsoft Teams achieved two years growth in the first two months of lockdown last year. Trust in technology has grown and people are now more willing to try new ways of working.
We’re seeing this today, with more businesses moving from an insource or an outsource model to a co-source one, where they use technology to extract, clean and process their tax data to give them a first draft which is then passed to an advisor to review and provide the value add. This shift will undoubtedly improve processes, allow better targeted use of advisor time, and reduce the costs associated with generating tax Returns.
While tax has lagged other areas of the business when it comes to transformation, it’s high up on the list of what can be automated and can yield real results. McKinsey estimate that between 30 and 40% of most finance functions activities can be automated (which would generate a 30-40% time reduction and help free up resource to provide insight to management and reduce cost).
Research by PWC reveals that those top performing businesses that have embraced automation have also changed their working patterns. Rather than spending the majority of their time on mundane transaction processing, reporting and compliance, and very little on insight and action, leading tax and finance teams have flipped the pyramid and are now spending over half their time on business insights and activity that can drive business value.
A primary driver for many Finance Directors therefore, is to use technology advances to enable greater control through making their tax processes more efficient, accurate and able to deliver valuable insights to the business.
Regulatory pressure also has a part to play in the way working practices are transforming. HMRC is currently in the process of devising a framework that spans the different tax regimes and will issue a Call for Evidence at the end of 2021. The framework will make it “easy to get tax right and harder to get it wrong”, with suggestions including smarter use of data to allow, for instance, the pre-population of tax Returns using data sourced from third parties. This is driven by HMRC’s desire to reduce the £31bn tax gap still further, especially the £5.5bn ascribed to “failure to take reasonable care”.
To make the tax process more efficient and able to meet regulatory demands, businesses will need to work towards achieving a singular source of tax data. This has the potential to dramatically reduce the work that goes into completing tax Returns given that taxes such as VAT and corporation tax are treated separately today. The duplication of effort involved is highly time intensive and the more the data is handled, the greater the likelihood of errors being introduced. Having a single pool of data will allow the same data set to be used to complete both.
Challenges facing tax teams
Yet businesses face a number of barriers to adoption. Traditionally, the finance function has not been a priority for investment in new technology. The widespread use of spreadsheets continues to be a major source of “meaningful errors” due to undetected input errors, incorrect formulas and broken macros. Their management can also be an issue because these often fall under the jurisdiction of one/a select few employees, which means reliance on institutional memory. Outdated, inefficient, manual spreadsheet-based processes increase risk and are unlikely to support the sophisticated data collection, filtering and checking procedures, necessary to give confidence in the numbers.
What to look for today
What’s driving change now are API-driven tax software platform architectures that can integrate with third party systems (such as data analysis platforms) as well as your ERP and accountancy systems. This is a real game changer because it potentially means you can pull data from disparate proprietary data sources into one place, paving the way for the single source of truth needed to complete multiple tax Returns.
So, what does a good digital tax architecture look like? Broadly speaking, tax technology is evolving into four distinct layers, with the top and bottom layers determined by the regulations of the tax jurisdiction the business operates in.
- The Data layer integrates with other systems to extract, transform and load (ETL) the data into a pool. APIs are used to extract the data from ERP and accountancy systems which is then standardised, interrogated and corrected prior to loading into the tax engine. This helps cleanse the data to create that all important ‘single source of truth’ which can be repurposed for any tax.
- The Applications layer manages the workflow of the tax function and controls the process by putting rules in place to regulate user access, risk and governance (ie SAO/BRR+). This centralised approach also enables better oversight.
- The Operations layer automates the different calculations for the different taxes and prepares the Returns, helping to minimise the need for human intervention. Data checks are also carried out here prior to the submission of the Return to increase accuracy.
- The Insights layer uses best in class data analytics capabilities to analyse the tax data. This allows you to compare current and historic submissions or look for associated tax reliefs that you could be missing out on, for instance. It can also be used for tax planning purposes and to inform commercial business decisions.
An action plan
Now that we’ve adjusted to the demands of MTD for VAT it makes sense to review your digital strategy, assess what HMRC is likely to require in the future and how you can use digitalisation to benefit your business. Key considerations include:
- Motivation – have you let compliance drive your decision making? Has this seen you select technology based on what will get you past the post rather than what will make your processes more streamlined, efficient and accurate?
- Goals – identify what it is you want to get out of the transformation of the tax function.
- Time – work out the number of man hours dedicated to each stage of the process and which areas could be automated (ie PESM is highly labour intensive but out of scope when it comes to digital linking under MTD for VAT. Other examples include data collection and blocking/excluding transactions). Are you looking to free up time for review and to file earlier?
- Costs – how much spend is dedicated to adviser review and could you reduce this?
- Insight – are you looking to get more oversight of the compliance process, your obligations and filing deadlines? To identify and claim additional tax reliefs? To gain better control over tax planning and to inform future decisions?
- Regulatory demands – do you understand the likely requirements we can expect from HMRC as it builds out its ten year plan? Is your strategy futureproof? Are you considering how you can migrate from your existing MTD solution to one that can span the entire tax regime?
- Market awareness – do you know the different types of compliance solution and the functionality they offer? Are you looking for open agnostic solutions that will work with your existing systems to reduce TCO? Are the vendors you are looking at able to offer you the support you need, have a future technology roadmap and do they keep pace with regulatory change?
How we help
Tax Systems’ market leading AlphaVAT digital tax platform has been specifically developed to support Finance teams on their digital journey and is part of our Alphatax360 vision which will see our technology move towards a single platform for taxes. AlphaVAT minimises touchpoints in the VAT process, reducing risk and accelerating completion of Returns, while providing tax professionals with confidence in the numbers. AlphaVAT delivers greater financial control by transforming the way VAT Returns are calculated into a more efficient, accurate and insightful process
To find out more about the direction of travel of HMRC, how technology is evolving and how you can position yourself to take advantage of both, please sign up for our A Guide to Digitalising VAT webinar or if you’d like some assistance in reviewing your existing processes and determining how you can futureproof them, do request a one-to-one consultation.