Tax compliance has historically relied upon specialist skills enhanced by digital tools but we’re now at a turning point. Human efforts alone are unlikely to be sufficient to meet regulatory demands going forward. An increase in the frequency of reporting, demands for greater transparency and the move to real-time tax will simply make it impossible to keep-up, making automation essential.
We’re already seeing evidence of this today. Tax authorities are using technology to digitalise tax regimes, increasing the compliance burden. China is leveraging big data to automate its tax system, Italy has mandated online filing, while Brazil has mandatory electronic invoicing. It’s Estonia that leads the pack, however, with real-time corporation tax triggered the moment profits are distributed to shareholders.
In the UK, we occupy the middle ground with the Making Tax Digital strategy now in full flow. The first wave of HMRC’s MTD program for VAT saw the successful mandation of digital submissions. The ambition is for MTD to be rolled out to encompass income tax and corporation tax in the future which is expected to see corporation tax reporting move to a quarterly basis. This, together with other moves, is helping to bring down the tax gap, currently at £35bn (the tax gap has been reduced from 8.3% in 2006 to 5.6% in 2018).
But it’s not just regulation that is driving change. Coupled with this is the need to improve business processes across the board. Business process automation, otherwise referred to as digital transformation, is a wider industry movement that aims to streamline business processes to deliver operational efficiencies and cut costs. In the tax team, this manifest as the need to:
Reduce risk and improve accuracy: the organisation needs to reduce the risk of errors that can then resort to misfilings and costly investigations. According to HMRC figures, when it comes to VAT, the highest cause of the tax gap is “failure to take reasonable care”, suggesting that human error remains the biggest stumbling block.
There’s now a real focus on reducing this risk by improving the systems and processes used to generate returns. For example, HMRC’s Business Risk Review+ (BRR+) focuses upon Systems and Delivery as one of three key categories used to assess risk, with a low profile enabling the business to manage its tax independently for three years.
Manage resource and improve efficiency: today compliance teams are not being utilised to maximum effect. They spend the majority of their time accumulating and checking data. Moreover, the stress to process returns on time at the end of the quarter/year can become intolerable.
For the CFO, it’s imperative that the business refocus this resource to maximise productivity. It’s a move welcomed by finance professionals who actively want technology to be used to perform data capture, for instance, to alleviate the compliance burden, with 68% of those in our Tax Professionals Survey 2019 welcoming the prospect of automation.
Of course, many businesses do already have systems in place and may well regard themselves as part automated. But in reality, these systems often hamstring the business. Accountancy systems and ERP solutions have very rigid processes, making it impossible to introduce the sort of automated calculations that are needed. Data still has to be extracted from these systems, often manually into spreadsheets, creating an arduous process of export/import and the rekeying of data. Because of this, spreadsheets are typically littered with errors with estimates suggesting up to 88% contain mistakes.
Managing these systems is now likely to become more demanding as regulatory demands increase. We can expect to see requests for more granular information in near real-time and digital audit trail capabilities which will mean data needs to be timely, accessible, and reliable. That’s a long way from how businesses function today, with key personnel tasked with populating and pulling information from spreadsheets.
While HMRC has acquiesced and allowed API-enabled spreadsheets to be used under the digital link requirements for HMRC, it’s a far from ideal solution. Yes you can link cells within spreadsheets to ensure compliance but the information digitally supplied to HMRC will only be as good as that within the spreadsheet. There are no controls, checks or balances to verify whether that data makes sense.
So if today’s processes won’t cut it, what will the tax process of the future look like? Organisations will of course still have legacy accountancy software but they’ll no longer have to do battle with these to try to make life easier. Instead, digital linking will extract this data at source into a data lake. This will act as a repository of reliable data which can be used for all manner of business processes, tax being just one of them.
The data lake will feed into a tax compliance engine via digital links. Within the compliance engine, the tax team will be able to execute complex calculations for numerous tax regimes ie CT, VAT, and statutory accounts, which can then be reviewed and amended within this environment. The final return is then submitted to HMRC via digital link so that, throughout the entire process, human interaction is minimised, significantly reducing the risk of errors.
This won’t happen overnight. Businesses will want to gradually put the elements in place to bring about end-to-end digitalisation. In our Tax Professionals Survey 2019, 72% wanted to introduce automation within the next five years. There’s a recognition it is coming, with 75% saying that more spend would need to be dedicated to technology. The danger is that knee jerk responses to MTD mandations will see businesses continually playing catch-up and forced to reinvest. For this reason, it’s important to adopt a scalable approach that allows the business to digitalise at a pace that suits its risk appetite. Migrating a step at a time reduces cost and disruption and provides a clear path to this future vision of an end-to-end digital process.
Understanding why automation is necessary and how it may evolve will help businesses identify where and when they need to automate their processes. It will help them keep pace with regulatory change, with their competitors, and ensure they can attract and retain professional talent. But ultimately it promises to transform the way the business operates. A lake of clean, reliable and trusted data can pave the way for digital audits, efficient use of human resource and improved decision making. This will see the tax function move from being reactive to proactive, providing valuable direction, and its for these reasons that businesses will ultimately seek to embrace automation.