Making Tax Digital was always going to be an ambitious undertaking. The simpler requirements of VAT made it an ideal candidate for testing the water, preparing the way for the digitalisation of more complex taxes, corporation tax and income tax. But will businesses have to invest again?
There’s already evidence of concern over future spend. In the House of Lords Economic Affairs Committee report (November 2018), businesses said they would “prefer to move to a system that would be compliant for all taxes”. They weren’t opposed to reform – it will reduce errors and increase tax revenues for HMRC, while businesses will gain productivity and efficiency benefits through automation – but they want any investment they make to guard against future regime change.
This is not an easy undertaking. VAT and corporation tax come from very different starting points. Most VAT reporting is already quarterly, so where MTDfV will see change is through the introduction of digital record keeping and submissions. Corporation tax already has mandatory e-filing but under MTD quarterly submissions will see the frequency of reporting increase.
Where the complexity arises is at the back-end. Many businesses already have compliance software to assist with corporation tax computations but digitalisation will drive an increased need for systems integration. Data will need to be collated from numerous native data sources and digitally linked to the compliance engine, effectively eradicating manual processes such as ‘copy and paste’, thereby rendering spreadsheets obsolete.
Of fundamental importance will be the use of automated data extraction and integration technology for completing computations. A forward looking compatible MTD strategy needs to procure systems that deliver MTDfVAT compliance for April/October 2020 whilst laying the foundations for MTDfCT compliance.
What will an MTDfCT solution look like?
The exact requirements are yet to be determined. However, the spectre of MTDfCT is driving businesses to ask vendors for a futureproof MTD solution. So, what might such a solution include?
- Digital record keeping: extended to meet the requirements of quarterly reporting
- Liabilities: an earlier view of tax liabilities using a projected corporation tax computation
- Digital links: drill back to source data in the accounting systems as statutory accounts (the normal starting point) would not be available
- Automation: machine reading techniques are already in use to apply basic income and expense analysis for the tax computation, and claims such as capital allowances and utilising losses could be applied automatically
Mechanisms will need to facilitate the extraction of data from accountancy and ERP systems into a central data pool. Data will then need to be consolidated into common formats while retaining full version history and preserving the ability to provide digital audit trails. An MTDfCT compliance engine can then easily use this data to complete the required return.
Of course, there are still issues to address. The intangible fixed assets regime, for example, is based upon following the accounting treatment, and corporate interest restriction could not be performed four further times per year. How the accruals principal is to be applied will need consideration to avoid painting a misleading picture on a quarterly basis. But there are undoubtedly mechanisms that can be put in place for MTDfV which will lend themselves to MTDfCT.
Investing in a solution that can demonstrate compliance with the anticipated requirements of these more complex taxes will help businesses protect their MTD investment. At Tax Systems, our AlphaVAT family provides a pathway to MTDfCT. To find out more about what automated data extraction means, see our whitepaper on The Evolution of Data Collection. Or to see how to prepare for further regime change, see our Digital as a Destination whitepaper.