Businesses are having to protect their cashflows and ensure watertight compliance as the government seeks to rebalance its books. But once ‘normal’ business resumes, we’ll see compliance and enforcement move to the fore, with behavioural and reporting deadlines reinstated plus the introduction of HMRC’s new points-based penalty system for VAT.
Tax teams are set to become an even more vital part of the business at this time but demands on them are likely to subtly shift too. Alongside helping the business to recover, there are three fundamental areas they will need to address.
Challenge 1: Validating source data
A big area of risk and concern for tax teams is in the errors that lie in source data. Checking this data can be time consuming with some large accountancy practices wasting an estimated 9 million hours per tax season.
Small mistakes can result in huge inaccuracies and put businesses at ever greater risk. An error rate of 1% at a large business can equate to millions of pounds. If the source data is incorrect, the submission will also be incorrect, attracting the attention of HMRC which look for proof of compliance at an increasingly granular level.
Chris Downing, Partner in Tax at KPMG, recently summed up the problem saying: “Too many tax professionals still believe that their job is about grappling with complex technical issues. The reality will be very different. In years to come the most important issue will be to get things 100% right, and to analyse the data and prove it is right.”
Automation can help with this but automation is, in itself, another challenge.
Challenge 2: Determining which parts of the tax process to automate
Tax teams accept that automation of workflow will happen and will even be beneficial to them. Gartner estimates an accounting team of 40 could save up to 25,000 hours of avoidable rework per year, for instance. But it’s important to think about how and where to apply automation. Not all processes will benefit and there’s no substitute for human expertise when it comes to understanding tax rules.
Areas that will benefit from automation include:
- Data collection – some large firms still aren’t using digital methods for invoice generation, for example. This leaves room for incorrect manual data inputs.
- Data extraction – automatic data mapping can significantly reduce the time spent transferring source documents to the tax software.
- Data Validation – reduces the time spent on manual checks and helps the tax team spot errors. Anomalies can be flagged in source data, for instance, allowing the necessary adjustments to be made prior to calculation and submission
- Data Integration – rather than re-keying information from one program or database to another, all ERPs and other software should speak to each other, using system integration or application programming interfaces (API’s).
Automating Adjustments, Calculations and Special Tax Methods
Most complex calculations such as rolling adjustments, capital goods schemes and PESM are performed in spreadsheets but as other parts of the tax process are automated the question that naturally arises is can we automate these too?
Today, many complex calculations are performed in spreadsheets but these increase the risk of error through the incorrect use of formulas, broken macros or simply human error. For now, HMRC are accepting the use of spreadsheets as a ‘manual’ adjustment but they still advise calculations be performed within MTD software.
Bringing these calculations under the remit of tax software helps mitigate risk. This is because it’s possible to time stamp adjustments and track calculations back to the transaction level, helping to create a digital audit trail.
If we accept that automation will take over some of these processes, we then need to think about how the tax team will adapt and upskill.
Challenge 3: Evolving the tax team skill set
Using automation to do the heavy lifting frees up tax professionals to concentrate on more nuanced areas where they can really add value. However, this doesn’t mean we need to all become tax technologists. A far more likely scenario is that the tax team will need to become more proficient at interpreting the data through the use of analysis and forecasting.
As Gerard Cannito, president of the NATP National Board of Directors contends: “The competitive forces in the area of technology developed for tax preparation try to replace qualified analytical thinking in the tax-preparation process. This leads to the belief that the tax code is simple. It is not. As we all know, the tax code is increasing in size and complexity each year. Software can only crunch the numbers: adding, subtracting, multiplying, and dividing. It cannot replace the qualified tax professional’s ability to apply the correct law to one’s tax situation.”
The tax professional of the future will be fluent in data analytics and tax rules as well as being adept at using real-time tax dashboards and visualisation techniques. Through these windows they will be able to compare current/ historic submissions and period-on-period payments to highlight areas of potential inaccuracies, forecast and compare against projected liabilities, and gain insights into data quality and error issues.
Being able to use data dashboards to automate error detection means the tax professional can work in the same way as HMRC, comparing current calculations with previous submissions. This will enable them to make sure they are compliant, to deal with any inconsistencies prior to filing and to answer any queries from HMRC post-filing.
Tax teams will also seek to use analytics to give them business intelligence (BI). PWC asserts that “A successful tax professional of the future will be highly proficient in data analysis, statistics, and technology, as well as process improvement and change management”. So we can expect to see more integration between best of breed tax software and BI software, providing the tax team with more advanced forecasting capabilities.
Analytics will help take the guess work out of the equation, enabling the tax team to submit the VAT Return with confidence, but interpreting the data will still require the application of the tax teams valuable skills. For this reason, we believe the tax team of the future will be augmented by rather than replaced by technology.