How digital tax is becoming a reality

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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.  

About Richard Sergeant

Richard Sergeant

Specialist insight and business development support for accountants and their vendors. Cloud advocate with a pragmatist eye.

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28th Mar 2019 10:50

Richard, you're running before you're learning to walk.
MTD for VAT is already a disaster. To get the under £85K business onto it will never happen. People distrust banks and cloud systems so, yes, there will be a peak in digitalisation, then a slow downward spiral. My view is that there will be a two tier system. The big boys with all their toys and gimmicks and the little fellas that will still deal a lot with cash and barter. You only have to ask Boeing about software giving you a false sense of security.

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to johnjenkins
28th Mar 2019 13:00

You could well be right. I'm just trying to see if the experiences of others heralds clues as to how things can develop.

Although I couldnt predict a timeline, nor HMRC policy/competency, I would come down on the side of those who might say 'inevitable over time' or at the very least 'thin end of the wedge'

If Spain can get to near live vat reporting...

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to rsergeant
28th Mar 2019 14:00

An interesting point Richard but have you seen who is in charge in the UK? It's beginning to look like our MPs aren't actually very bright, are they? And as for the HMRC management - well we already know about their standards.

So while Spain or Poland might get these systems in place, I think the UK just has no chance whatsoever

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to TaxTeddy
29th Mar 2019 12:23

Depressingly true, Tax Teddy.

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28th Mar 2019 12:21

Convenience will be the driver for the success of digitalisation - it starts with digitisation which puts the components in place ( the "little fellas" already use smartphones , contactless payments , digital banking and are being encouraged by their agents onto cloud based invoicing and accounting platforms), and then it is a matter of incentivising the infrastructure providers to facilitate the joining up of the "pipes" in the background in a way that makes it just easier for users to go with the flow. Inertia does the rest. There will always be hold-outs but over time they become viewed as eccentric or worse. Once crooks adapt and find ways to live within the new ecosystem it truely has become the new normal.

Agreed that MTD has been clunky but much of the current resistence is about demographics and over time the problem solves itself as millenials (who expect digitalisation as a matter of course) become the bulk of the working population and the generations behind them are even more digitalised.

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to chasmeehan
28th Mar 2019 14:53

Convenience is really only for the smaller, day to day stuff. There is a vast difference between millennials working for the big boys and small business started by the less digitised entrepreneur. The resistance isn't about digitisation it's about mandatory use of it when people do not trust software, cloud, bank streaming etc. with good cause. Crooks are always in at the beginning until problems are sorted. Once everyone knows what's what they move on to the next over costly project.

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28th Mar 2019 20:18

What goes around comes around.
The currently ascending dependence on airwaves and apps will decline as the perceived inherent safety of these systems is inevitably compromised.
Add to this the de facto increase in the 'fixed cost' of starting a business, both in terms of the actual costs, but also exposure to the risk of unpredictable penalties, fewer people will be willing to take the risk.
Something >90% of UB businesses are very small and employ 3 or fewer people and the proportion of time taken up with conformance and compliance [esp. given HMRC's track record in propogating process changes] becomes cripplingly significant. HMRC's drive to make it, at best, hard work to oursource book-keeping/accounting from these small operators to their 'accountants' just piles pain upon ache.

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to dgilmour51
29th Mar 2019 09:16

The point of MTD is to get the small self-employed, in whatever guise, onto PAYE. HMRC don't want to deal with small concerns, although they don't realise that it is the small concern that is the backbone of this country.

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to johnjenkins
29th Mar 2019 12:28

To add to that Johnjenkins I'd also say that the 'point' of MTD was to allow HMRC to sort it's brown-stuff out and have systems for the next 20 years.

No self respecting tax authority WANTS to be behind the curve.

The impact, I agree, is many and varied...

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29th Mar 2019 12:29

BTW - the Survey referenced here can be downloaded here https://tax.thomsonreuters.co.uk/onesource/European-Tax-Tech-Survey-2019/

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