How digital tax is becoming a reality
Do the very large corporations have much to tell the general business market about tax technology and the direction of the relationship with HMRC?
At the recent Tax Technology Leadership Summit in London, Thomson Reuters revealed further indicators about how businesses are adapting and reacting to MTD and, by taking a broader view across Europe, provided insights into the impact of a more digitally capable tax authority. Critically this also provides clues as to what all UK businesses might expect to come over the next five to ten years.
The major trends identified by Piotr Marczewski, president of corporates at Thomson Reuters, are increased regulation (both in terms of complexity and the rate of change), changes in business models, and advances in technology generating demand for transacting more digitally.
Taking the view that compliance-driven organisations are increasingly being driven by technology, the need for transparency and accuracy paints a picture of both an improvement of business process but also a potential arms race with the tax authority.
As MTD for VAT mandates digital record keeping, it’s not hard to see how the clients of accountants have the potential to get increasingly sucked into this escalation of adoption and reporting.
Digital tax is becoming a reality
Leaning on the results from the 2019 European Tax Technology Survey, Steven Smith, propositions lead in Europe for Thomson Reuters, reflects that the implications of digital tax are becoming real. “After hearing about it for a number of years, it is here and we are seeing it happen across Europe and the globe.
“MTD for VAT is the UK’s focus, but this is following in the wake of digital initiatives in Spain, Portugal, Greece and in particular Poland, and with more countries following including Germany and Norway”.
The pressure on businesses to conform is one of process, but it also brings with it other pressures for larger organisations. Increasing pressure from authorities is coming hand in hand with media attention and subsequent added interest from the boardroom.
Tax affairs are now being scrutinised in terms of investor relations and share price, and there is evidence that forecasting on tax is increasingly becoming forethought rather than an afterthought.
Although most small businesses are unlikely to have exactly the same pressure, what a more digital tax environment does seem to herald is an unprecedented amount of transparency on both the data available and the system of collation. The cost of which is far from being well understood.
Transparency in data and process
What we do know about MTD is that it is first and foremost about process and not the regulations around VAT per se.
The extension of this for Smith is that, “In time we will see a movement away from just submitting filings, to it being the other way around – where a view of your tax position is already known and assessed, and the role of the adviser (tax expert) will be to see if it is right, accurate, and a fair on balance position”.
The thought of HMRC knowing more about a company’s tax position than the business or their accountant may not be so far-fetched in principle if, as in Poland, transaction level data becomes accessible.
The role of big data analytics and AI may seem out of reach for smaller organisations at the moment, but governments have the scale and intent to get much out raw data if they are motivated by increasing tax take.
Smith also provides other evidence where regulators are just as interested in controlling and auditing process as they are the outcomes: “The FCA for financial services in the UK, is a very real example of pushing good practice as well as accuracy of service, and this will be replicated in tax as well.”
The soft landing around digital links (and to an extent, penalties) of MTD for businesses of all sizes shows rather that HMRC is keeping a tight rein on mandating process, requiring businesses to get it right sooner rather than much later.
This emphasis on process is likely to take centre stage once more when the arrangements for corporation tax become known, and the very nature of self assessment evolves into something quite different.
Technology adoption as a challenge
Before we get that far, the adoption of technology for some organisations as we know is still a challenge. From a corporate perspective some of these challenges overlap with the experiences of SMEs: processes that have grown up over time, cultural behaviours, lack of business incentive, cost benefit of investment and the like.
However, from the conversations on the floor, it would seem that there was a greater desire to push back to the wider organisation (notably IT and the board) to look again at investment in updating financial and in particular tax systems.
One delegate from one of the major banks emphasised the leverage MTD had given the department to seek investment for point solutions and also as a justification for outsourcing more.
Another from a city property company talked about having to prepare for more active conversations with their external tax advisers, with a focus now on looking at ‘optimising’ their financial processes and adopting cloud.
Although these companies are far removed from the majority of VAT registered businesses, a small business is not necessarily a less complex one as many accountants know.
If we can extrapolate and look at the experience of others who are further down this road, it would seem yet again more evidence of the value clients will place in having a reliable adviser of useful and suitable software, process improvement, and indeed outsourcing of compliance.