house of lords

When the House of Lords Economic Affairs Committee released its report on the progress of Making Tax Digital for VAT the press quickly latched on to the fact the report called for a year-long deferment. But look a little closer at the Committee’s findings and you’ll find some interesting insights into the shortcomings of the industry. The report effectively identifies some critical issues with the way solutions are being designed and marketed and should act as a wake-up call on what to look for when making a selection.

1.    Future proof functionality – The report openly states that businesses would “prefer to move to a system that would be compliant for all taxes”. Putting VAT to one side, MTD is expected to see both corporation tax and income tax become digitalised, albeit no earlier than April 2020. Small wonder then that businesses want solutions that are designed to support more than just VAT submissions. They want to be able to make a selection that can stand the test of time and accommodate future digital tax demands. It is this need to make “the best long-term choice” that spurred the Committee to call for a deferment in the first place, although this was not widely reported in the press.

2.    Access to data – The report refers to businesses having “specific concerns about data retention”, i.e. access to records, and that changes to the software or a change in supplier could jeopardise that access. In reality, most solutions are housed in the cloud which will ensure some form of continuity meaning that if more backend solutions are brought into the mix or the solution is upgraded, client data remains accessible. If the business switches supplier or the solution is discontinued, the business needs to guard against legacy data retention and access issues by ensuring the supplier has an end-of-life policy that preserves access to data.

The key concern many have expressed is that digital data will not be held for the required period of time. Typically, such data is retained for a maximum of two years by vendors when regulatory requirements stipulate that VAT data should be retained for six years.

Other issues to bear in mind include complex run-off licence fees and costs, managing credentials to old systems, and the problem of who is assigned access i.e. if a single employee has the login credentials and then leaves this can create difficulties, so the business needs to have policies in place to prevent these scenarios.

3.    Comparing apples and oranges – The report also calls for HMRC to make “provision for establishing and certifying which software options are compliant with Making Tax Digital for VAT” to assist businesses that “lack the expertise or confidence to inform their choice”. Many are finding it difficult to obtain the guidance they need in making their selection and the Committee surmised that HMRC could play a valuable role here. However, this could directly contravene the objectivity prized by HMRC which “does not recommend or endorse any one product or software provider”.

HMRC maintains a comprehensive list of solution providers with ‘VAT compatible software available now’ but with more than 100 solutions listed objective comparison is a tall order. Many of the vendors specialise in particular verticals, some are pure play accounting software solution providers with bolt-on MTDfVAT functionality, while others are offering OEM solutions. This makes it very difficult to identify dedicated MTD solutions that will provide future tax compatibility. Having qualifiers that make these solutions demonstrate whether they can meet some of the criteria outlined above would be a welcome step and one which would not compromise HMRC’s objectivity.

In conclusion, the Committee’s report surmises that the “emerging software market appears difficult to navigate”. It states it is “unfair to expect businesses to make choices about their accounting software without a better understanding of the future MTD regime”, the inference being that future compatibility with the digitalisation of other taxes should be a factor, and it makes a very valuable point that compliance should not be the primary objective here. Ultimately, the report calls for businesses to be encouraged “to choose digitalisation for productivity, efficiency and modernisation reasons rather than just tax compliance”. This is perhaps the biggest take away from the report and yet it’s one that was not widely reported.

Digitalisation should be spurred by the benefits automation can offer. In practice, many people focus on the most high-profile items on the ‘to do’ list so it is likely that deferment will lead to deferment of action from businesses. This poses the danger that purchasing decisions will be made in haste and will then be repented at leisure if that solution does not confer these efficiency and productivity gains. It’s for this reason that we need to start looking at MTD not as the end goal but as a driver towards better data integrity, automated workflow processes and greater transparency if we’re to transform the tax process productively.

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