Rebecca Cave talks to Richard Asquith about the true drivers of MTD for VAT. Is there more to it than the goal of eliminating human errors in VAT returns?
Richard Asquith is Avalara’s VP in global indirect tax and has been keeping a close eye on the government’s Making Tax Digital for VAT programme. In this interview, he tells AccountingWEB consulting tax editor Rebecca Cave why HMRC is going to all this trouble to change its VAT data delivery mechanism, and where he sees the system ultimately ending up.
Rebecca Cave (RC): HMRC has repeated said the aim of MTD for VAT is to eliminate the errors introduced when someone manually types VAT return figures into the online form on the HMRC web portal. Is the real reason for MTD just to iron out a few transposition errors?
Richard Asquith (RA): Its true, HMRC’s main goal for MTD is to end manual interventions which can introduce errors to the VAT filing process. HMRC says these errors create over £600m in VAT miscalculations. However, after close investigation, most of these ‘unintentional’ errors turn out to be in the businesses’ favour!
RC: Why are these errors introduced by the current methods of completing a VAT return?
RA: The problem stems from the fact that only just over one in ten VAT registered businesses use the current XML-based data upload function in their accounting software to submit their VAT return automatically to HMRC. Most businesses login in manually to the current VAT portal and manually key in the numbers.
Some people are just resistant to the necessary change to move to full automation. However, many others need to make manual adjustments to the VAT totals outside the accounting software, perhaps in a spreadsheet. This does explain some of the reluctance to move to automatic filing of the return using accounting software.
RC: As the MTD-filed VAT return will only supply HMRC with the same nine boxes of VAT data, how will MTD solve the error problems?
RA: You are right, it is an enormous upheaval to deliver what HMRC already receives in terms of data. Instead of making the well-trusted XML upload mandatory for all VAT returns, HMRC is instead introducing a new format for data submission. This will require upgrades to all commercially available accounting packages and also to all in-house developed software.
RC: Why is HMRC going to all this trouble to change the data delivery mechanism?
RA: A closer look at the new reporting format being imposed by HMRC gives a big clue as to what’s coming next. Plus, if you a look around Europe and beyond, there are further clues to HMRC’s future plans to gain unprecedented access to companies’ accounting records.
RC: Is this why HMRC is insisting on data being submitted through an API?
RA: The technical reason is that the Application Programming Interface (API), which receives the VAT return data into HMRC’s computer servers and returns responses, can handle a lot more data much faster than the XML process. The API works using JSON files, which are already in computer code. This means huge amounts of data can the transmitted and returned in an instant.
XML, at over 20 years old, is frankly a dinosaur in computing terms. The XML method of submitting data needs a lot of tagging which uses significant computer memory, and it
requires a lot of retranslation by the computer servers. But the real reason for going down the API route is that HMRC wants more than just the current summary VAT data.
RC: What’s the long game here? Surely there must be some tax savings in HMRC’s sights?
RA: HMRC has its eyes on the continuingly stubborn VAT gap. This is the estimate of the amount of total VAT due, based on levels of national trade, less the amount of VAT actually collected. The latest estimate of the VAT gap is £13.3bn, from figures released in October 2018. This showed an increase of £1.3bn over the previous reporting year. The European Union, by contrast, has managed to cut its own VAT gap by €10bn to €147.1bn in its latest published figures.
HMRC has concluded that it needs more data from taxpayers to identify whether the gap is created by honest errors or deliberate fraud. That is why it is forcing the investment by all VAT-registered businesses in API reporting. Eventually, the API pathway will enable HMRC to receive the mass of invoice-level detail from businesses that it needs to tackle the VAT gap.
RC: How and when will this come about?
RA: The switch from XML to API reporting under MTD from April 2019 is just the warm-up. If that goes to plan, and once all accounting records have a full digital journey (after the one-year soft-landing phase), then the data demands could be widened.
I believe that full ledger transaction reporting will be requested around 2021. Any transactions involving a VAT element will be stipulated: general ledger, sales, purchases, stock and fixed assets. Ultimately, the API could also carry the burden of delivering bank account-level transactions to provide tax settlement details.
When this level of data is provided by all parties in the transaction chain, HMRC, using its hugely powerful analytical software, will be able to independently check everyone’s version of each and every tax transaction. This will help highlight errors or fraudulent activities such as missing trader fraud, and it will mean HMRC will probably know taxpayers’ businesses better than their FD or CFO.
RC: All this is sounding very “Brave New World”, will it really happen?
RA: I’m afraid it will, and it is already the reality in some countries. Spain and Hungary now require live or near-live reporting of sales invoices to process immediate checks and identify fast-moving frauds.
RC: This gives the tax authority has a huge amount of power, could HMRC ultimately control who gets paid out of which businesses?
RA: Yes, it could go one step further to pre-approval of invoices, as much trailed in Brazil and in Italy from 2019. In these countries, the tax authorities can now block suppliers’ invoices from being issued if they do not like the look of the VAT treatment.
RC: How long will it take for HMRC to have the same power?
RA: I estimate that within five years HMRC will want to have killed off the VAT gap. With MTD it will have the power to achieve this, but we will all have surrender the keys to our accounting records, in real time.
About Rebecca Cave
Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.