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Making tax even more digital: Why MTD is inevitable

28th Jun 2018
Director Principle Point
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What’s clear from the digitalisation of tax authorities across Europe is that Making Tax Digital is not going anywhere. Richard Sergeant investigates.

MTD certainly stirs the passions, and there’s nothing like the swirling debate about whether it is a good or bad thing, and whether it will actually happen or not.

Regardless of where you stand, it is inevitable, and it will probably be more far-reaching than you imagine.

That is if you live in the UK. Because for many places around the world the digitisation of their tax authority is well underway, already mandated, and proving to be an attractive template for others such as HMRC to follow.

Businesses are already feeling it

In Thomson Reuters 2018 European tax technology survey which talked to large businesses right across europe, 53% said that tax regulation had increased with a similar amount saying that the amount of information required to support filings had also increased.  

Furthermore, 37% said they were aware of their tax authorities plans to implement digital filing and compliance. An astonishing figure compared to five or so years ago and illustrates both the determination of this trend and the increased burden on businesses to comply.

Interestingly the main tax software selection priority was security, raising real concerns around themes of manual processes and use of spreadsheets, reputational damage and bad PR around tax affairs being exposed, increased complexity around formats and standards, and of course conforming to GDPR.

It would seem that transparency and increased reporting go hand in hand and take security risk way beyond the concerns of using ‘cloud’. In fact this speaks to knowing where all the data is and who has access to it.

But where is this being driven from?

OECD makes the running

The Organisation for Economic Co-operation and Development (OECD) are setting the global agenda. In the area of tax the drive towards greater tax transparency, accountability, and ‘true’ collection of tax owed have seen a raft of initiatives and reporting formats such as Base Erosion and Profit Shifting (BEPS), country-by-country reporting, and critically the Standard Audit File for Tax (SAF-T). None of which would be possible without the technology being available to implement.

SAF-T and the gateway to digital tax

SAF-T is well worth looking at in more detail as it is both intense, and provides the blueprint from which tax authorities are then developing their digital tax regimes.

In effect it is a schema not unlike XBRL that requires the following to be submitted:

  1. The full general ledger and journals
  2. Accounts payable, with vendor master data, payment ledgers
  3. Accounts receivable with client master data, payment ledgers
  4. Warehouse inventory product master files and inventory movements
  5. Inbound and outbound flow of goods
  6. Fixed assets ledgers, depreciation, and amortisation

Recommended to be submitted monthly.

Not only does it have implications for the audit, but in the short term the format brings distinct advantages for tax take.

For all that though, there are differing interpretations of these standards, and different countries are implementing with varying criteria.

At its core though, the OECD is setting the benchmarks for global standards, granular reporting and a digitisation of the relationship with tax payers; and it’s been filtering down to tax authorities for years now.

Digitisation of tax authorities

VAT (indirect taxes) are where the most obvious successes have been: Spain (with SII), Portugal, and Hungary are obvious examples but not unique. In the case of Spain they have a near live reporting regime. Not all are requesting the full SAF-T data and other countries like France, Belgium, Netherlands have or are adapting to suit; however, the direction of travel is clear.

2019 will also see Greece, Italy (SDI live reporting of sales) and even the UK (MTD for VAT) eventually follow suit. So this is neither new or parochial.

And what we are talking about is not just replacing paper with tax authority filing portals, but utilising direct links from software straight into their systems.

Poland leads the way

Poland has recently become the poster child for the OECD ambitions and where many tax authorities are now starting to look closely. After introducing mandatory SAF-T filing alongside VAT declarations for larger organisations in 2016, this was extended to all VAT businesses in January 2018. After only four months the results have been impressive.

Through big data analysis they were able to identify 85,000 “suspicious invoices” (not necessarily fraudulent but just inaccurate) made by 36,000 entities, and collected some PLN 150m. They were also able to send emails and SMS text messages to the owners of these suspicious invoices and ask them for more details or to make aware of errors.

The success has been as such that the Polish finance minister, Teresa Czerwińska, has unveiled plans for Personal Income Tax (PIT) and declared: “We plan to move away from the VAT declarations at the beginning of next year; the uniform VAT Control File [SAF-T] should completely replace it.”

This is a fundamental change to the relationship between taxpayer and authority and creates a clear path for future implementation across all taxes.

Where is this leading?

If we take all this into account the evidence is that for most countries of the world, the relationship taxpayers will have with tax authorities will look something like this:

  • Mandatory digital filing
  • Demanding access to granular (transaction level) data
  • Access to data directly via open banking and government departments
  • A requirement for broad acceptance of technology by businesses
  • Increased compliance complexity

Which puts MTD into perspective.

Whatever our views on what is being asked by HMRC, and what it is capable of delivering, there is no doubt that this the direction of travel. And depending on the political priorities of the day, it is only a matter of time before nearly all taxes are dealt with in this way.

In part two, we’ll take a different view on the influence of technology and MTD and explore why it’s the tax department that should be braced for the biggest changes, not the accounts team.

 

Replies (30)

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Tornado
By Tornado
28th Jun 2018 13:57

Like many people, I think, I have no particular problems with a long term move towards digitisation, but the way it is being introduced in the UK is shambolic with no practical timetable or established reliable working infrastructure.

One particular unsatisfactory aspect of the UK introduction of MTD is that the software to support MTD is being developed commercially and often by non-UK companies.

In my view, the Government should provide the MTD software for us all to use in a universal format that can be understood by everyone using it. This way, we would all be using software that was designed to specifically deliver the results that the Government require in a consistent and guaranteed way across all business activities.

I would be interested to know just how many of the countries that are more digitally advanced that us are using software and systems provided by their Governments.

Thanks (12)
Replying to Tornado:
By Charlie Carne
29th Jun 2018 10:48

Tornado wrote:

In my view, the Government should provide the MTD software for us all to use in a universal format that can be understood by everyone using it. This way, we would all be using software that was designed to specifically deliver the results that the Government require in a consistent and guaranteed way across all business activities.

Oh dear, God, no! Government has had no success in delivering complex IT projects on time or to budget. And, even if they did, they wouldn't keep developing it to add new features (unless changes in legislation demanded them). Commercial software houses will compete with one another to improve their product every day (look at how Xero and QBO compete to make each other far better) and they can be forced to "specifically deliver the results that the Government require" by being given strict criteria to make them compatible. Just look at payroll software: there are hundreds of suppliers, all of whom are perfectly capable of abiding by the RTI rules. I wouldn't use the appalling (albeit functional) Basic PAYE Tools program provided by HMRC when commercial products are far easier to use.

The only reason to want Govt-provided tools is to avoid paying a licence to use the software. If you don't want to pay for the tools of your profession, maybe you should find a new profession? After all, does a garage mechanic expect the Dept of Transport to pay for his MOT-testing equipment?

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By martinengland
29th Jun 2018 10:17

No-body is arguing about whether tax goes digital.

The issue is, and has always been, the fundamental issue-illiteracy of HMRC regarding all matters MTD.

And it's part of a much wider issue. The root issue is the issue-illiteracy of ALL government departments in ALL matters of ALL policy decisions and ALL policy choices. Whether its structural reform of the NHS to make it sustainable, or the Treasury's idea of fiscal policy and "economic modelling", or DExEU's idea of a Brexit "strategy" (based on the Legatum Institute's "Road To Brexit", which is issue- and politically-illiterate), international aid, migration, border control etc etc etc, issue-illiteracy infects all aspects of UK government like cancer.

Parris once lamented in the Times about a tolerance of incompetence. I think his lament might go down as one of the greatest understatements in history.

Thanks (8)
Replying to martinengland:
Tornado
By Tornado
29th Jun 2018 10:35

"The root issue is the issue-illiteracy of ALL government departments in ALL matters of ALL policy decisions and ALL policy choices"

I couldn't agree more.

It may seem old fashioned, but in the days when civil servants had a clearly defined status structure, you knew that when you were dealing with people higher up the structure, they were people who had progressed through the Civil Service exams and were experts in their fields. This was good for everyone as often they were able to put forward sound arguments and were willing to compromise where there was no clear solution. Relationships between HMRC and Accountants was excellent in general.

These days we are dictated to by civil servants who are ignorant, arrogant and are nor prepared to take responsibility for their actions. The public purse is perpetually nearly empty as vast amounts of money are wasted on pointless projects.

The Good Old Days were good, mainly because the Civil Service really did know what they were doing in stark contrast to today where they simply think they know what they are doing.

Thanks (7)
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By listerramjet
29th Jun 2018 10:18

It is a major and worrying change in the nature of the relationship between government and individuals; and makes very key assumptions about the state of typical general ledgers which just aren't borne out in reality. And I would be surprised if SAF-T is compatible with what was our data protection legislation.

Thanks (4)
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By Robbo
29th Jun 2018 10:19

Included is detailed warehouse inventory records, most small businesses do not have these & without them the profit calculation is meaningless.

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By richardterhorst
29th Jun 2018 10:27

Just bend over and enjoy it.

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By SteLacca
29th Jun 2018 10:28

The big problem is that, even from OECD perspective, the goal is to ensure compliance (and sod the administrative burden placed on business).

The single flaw in that philosophy is that only those businesses intending to be compliant will use digital platforms properly, and so only those trying to be compliant will be punished for making a mistake.

Business that intends to defraud the system will simply continue to defraud, by not recording transactions at all. Whilst laudable in its aims, digitisation will not catch the wilfully criminal.

Thanks (3)
Replying to SteLacca:
Tornado
By Tornado
29th Jun 2018 10:42

"Business that intends to defraud the system will simply continue to defraud, by not recording transactions at all. Whilst laudable in its aims, digitisation will not catch the wilfully criminal."

As you say, if you don't put your head above the parapet, you will not be shot at.

A simple but effective policy for some.

Whilst researching the tax system in Kenya for one of my clients, I found that anyone in business must prepare accounts that have been 'approved' by a qualified/approved practitioner and those Accounts must be submitted with the Tax Return.

A interesting thought and in complete contrast to to do-it-yourself-tax approach in the UK.

Thanks (2)
Replying to Tornado:
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By johnjenkins
02nd Jul 2018 11:56

It still won't get the small business to comply and you know that.

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By Bruce Roberts
29th Jun 2018 10:42

The digitisation of the tax process is inevitable and quite probably desirable. However, the introduction process in the UK is shambolic.

HMRC systems are untested or don't work or are unreliable or have too few safeguards in place. In fact the existing systems have all these flaws. From the client/user perspective MTD is being introduced by the very blunt tool which is legislation. It is compulsory, it is being introduced without an incentives, without any support, with little concrete information, insufficient time for testing and education and almost no publicity outside the accounting profession.

Accountants are not luddites trying to protect a dying art. Most of us are enthusiastic about technology but the way MTD is being introduced is quite simply a recipe for disaster and will probably put back the cause of tax digitisation by a decade.

Thanks (4)
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By Ammie
29th Jun 2018 10:51

We will all move on with it and HMRC will have little choice than to allow a lengthy period for adjustment and provide timely support not resistance and delays as they have become accustomed to.

The penalties proposed need to be sensible and applied in extreme cases of non compliance.

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By leon0001
29th Jun 2018 11:24

The real problem is that the whole project is being done backwards. They shouldn't have started with a huge budget to be spent, thin air deadlines and software.
Briefly, the project should have started with realistic objectives, consultations with all interested parties, then drafting policy, specifications and legislation/regulations. The next step is software design, testing, modification where necessary and approval.
You then give taxpayers and/or agents time to determine specific requirements and responsibilities, select appropriate approved software, make the necessary staff adjustments and allow time for training and parallel running.
Implementation should be staged, starting with the largest businesses first and working downwards through the medium, small and micro.
The new system should exempt any business where it is clear that digitisation on a quarterly basis will be burdensome and without any measurable benefit to taxpayer or Revenue.
Instead we have an expensive, wasteful, inefficient, unworkable botch.
The polite term is omnishambles.
The real description starts with the word cluster.

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By Ian McTernan CTA
29th Jun 2018 11:40

I wonder if those other countries have as disjointed a tax system as ours is- where you can't access ONE point of reference to check all of a client's taxes in one place and at the same time. You can't transfer taxes between them...

First thing should be to merge all systems so that there is ONE tax system where all taxes are covered.

Then make a system that doesn't take all data and then endlessly send out error messages - I wonder out of those 85,000 invoices mentioned above how many were actually inaccurate. For the 90% that weren't, that cost them all extra time and resources proving they weren't.

What about small traders with little to no accounting software, who then try and save money by not employing an accountant to do their software accounting- there will be millions of mistakes, will the system catch them all or just end up in a huge mess of paperwork.

One thing is certain- it will lead to more cost of doing business and more automated enquiries which businesses will then need accountants to help sort out.

I pity the small trader or business just over the VAT threshold, who will be forced to try and use expensive software on a computer they don't own or want and then face an automated query with threat of huge fines.

Thanks (6)
Replying to Ian McTernan CTA:
Tornado
By Tornado
29th Jun 2018 11:54

"I pity the small trader or business just over the VAT threshold, who will be forced to try and use expensive software on a computer they don't own or want and then face an automated query with threat of huge fines."

Whilst this seems an inevitability, the bottom line is that HMRC will be unable to deal with all of the appeals as their existing staff are pretty demoralised already and there are simply not enough of them to deal with hundreds of thousands of appeals and queries, many of them pretty minor and insignificant.

Yes, masses and masses of information might seem desirable for Government but what the heck are you going to do with it and who in HMRC is going to be inspired enough to pursue such pointless and unproductive work. Taking a sickie to watch the football or some other more interesting pursuit is going to be a much more attractive alternative.

Thanks (6)
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By Michael C Feltham
29th Jun 2018 11:58

"In effect it is a schema not unlike XBRL that requires the following to be submitted:".

An excellent exemplar of how HMRC and Government screw up anything connected with ICT they address!

The World de facto standard for financial document interchange was XBRL.

HMRC? Nope!

They demanded iXBRL!

Dedicating ANY manual system to digitisation requires, firstly, that all anomalies, errors, conflictions and etc, be eradicated. Otherwise the old Data Processing rule GIGO holds true (GIGO: Garbage In; Garbage Out).

I must say the French bureaucracy, which suffers a bad rep, is not as bad as the UK's!

But then, France still has a major computer company, Bull: and computerised basic systems well before the UK: Peage (Toll Roads), e,g,; fuel pumps accepting cards and so on.

Thanks (1)
Jonathan@Aiteo
By [email protected]
29th Jun 2018 13:07

I think we need to be clear about what's inevitable and what isn't.

Digitisation of the tax system is, as with everything digital, a long-term trend converging towards integration of systems through digitalisation. In that sense it is almost certainly inevitable.

Making Tax Digital is the government's project to make some progress towards that destination, and there's nothing inevitable about the success of this project, especially in respect of the timelines they are putting forward.

"Making Tax Digital is not going anywhere" might be much more prescient than Richard intended it to be.

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By adam.arca
29th Jun 2018 13:12

Like many, I've been opposed to MTD not because I thought digitisation was a bad thing but because I didn't trust HMRC not to turn it into an utter balls-up and make life even harder for taxpayers and their accountants.

But, actually, upon reading this article I do think I'm opposed to digitisation if this is the BIG BROTHER future it proposes. On a more fundamental level than accountancy and tax, there are surely very serious personal liberty implications in the amount of data that governments are seeking to appropriate to themselves and it can only be a very small step from acquiring that data from businesses (but with significant tangential reference to the individuals with whom those businesses interact) to then acquiring it direct from the individual.

We supposedly live in a free society and part of that should surely be, within certain limits, the freedom to break the rules and then have to accept the potential consequences. It very much appears to me that digitisation will be as much a policing measure as an economic one and this will be a case where the "cure" does more damage than the disease.

It's also interesting to note that, assuming the article is an accurate precis of OECD intentions, nowhere is there any measure of using digitisation to improve customer-facing services and improving taxpayer outcomes, rather it is all about governmental data grab.

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By dmmarler
29th Jun 2018 13:12

I do not see why we have to follow OECD's recommendations - is it a contender to replace the EU? I notice that Russia is not an OECD member ...

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By [email protected]
29th Jun 2018 13:18

As all accountants know the biggest mess they come across in practice is clients computerising themselves without really knowing what they're doing nor wanting to spend a lot on it taking advice (understandable) so 'rubbish in rubbish out'.
MTD will be good for accountants a lot more work but I think small businesses will be under even more strain which is very unfair verging on then giving up if that is an option

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Replying to [email protected]:
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By leon0001
29th Jun 2018 13:25

Client: If I get a computer for my accounts, what will it do for me?
Me: In your case, you will be able to make bigger mistakes faster.

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Replying to [email protected]:
By SteLacca
29th Jun 2018 16:16

You do, unfortunately, seemed to have overlooked HMRC's parallel efforts to sidestep and marginalise professional representation.

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By Mr J Andrews
29th Jun 2018 13:36

Consensus is that a digital system of some sort might be beneficial but knackered by crass incompetence by HMRC, with the likes of Jim Hacker and Humphrey Appleby leading the last remaining Revenue staff stalwarts awaiting their New Year bongs.

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Replying to Mr J Andrews:
Tornado
By Tornado
29th Jun 2018 13:46

"with the likes of Jim Hacker and Humphrey Appleby leading the last remaining Revenue staff stalwarts awaiting their New Year bongs."

Oh dear, what a terribly cynical thing to say.

Perfectly true, of course.

Thanks (1)
Replying to Tornado:
By Nick Graves
29th Jun 2018 16:36

Tornado wrote:

"with the likes of Jim Hacker and Humphrey Appleby leading the last remaining Revenue staff stalwarts awaiting their New Year bongs."

Oh dear, what a terribly cynical thing to say.

Perfectly true, of course.

Bong usage might possibly explain a lot about HMRC, man.

Thanks (1)
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By ShayaG
29th Jun 2018 15:01

Nothing about the current MTD proposals, which require the *same* 10 numbers to be reported to HMRC as were needed previously, advances the government's digital agenda. I'd see a rationale if full purchase and sales information needed to be submitted - I'd see it as highly intrusive and radical rebalancing of the current status quo between private businesses and the state - but I'd see the value in it for verifying and reducing fraud. Not so this illiterate, pointless MTD program.

There is no more chance of a data entry error decreasing tax then there is of a data entry error increasing it. There is no more chance of error in transposing summary figures from software into a web page then there is of typing in numbers from an invoice wrong into the underlying software. As for fraud - MTD explicitly is not intended to deal with fraud.

There will be no increase in the tax take from this wholly shambolic exercise undertaken only because of one more u-turn would be more than this weak government can withstand.

The best that HMRC can say? I wrote to my MP who forwarded the response of the minister thanking me for my concerns and pointing out that the estimated transition costs of £185m would be allowable as deductions against taxable profits.

Thanks (3)
Replying to ShayaG:
By Nick Graves
02nd Jul 2018 11:46

ShayaG wrote:

Nothing about the current MTD proposals, which require the *same* 10 numbers to be reported to HMRC as were needed previously, advances the government's digital agenda. I'd see a rationale if full purchase and sales information needed to be submitted - I'd see it as highly intrusive and radical rebalancing of the current status quo between private businesses and the state - but I'd see the value in it for verifying and reducing fraud. Not so this illiterate, pointless MTD program.

There is no more chance of a data entry error decreasing tax then there is of a data entry error increasing it. There is no more chance of error in transposing summary figures from software into a web page then there is of typing in numbers from an invoice wrong into the underlying software. As for fraud - MTD explicitly is not intended to deal with fraud.

There will be no increase in the tax take from this wholly shambolic exercise undertaken only because of one more u-turn would be more than this weak government can withstand.

The best that HMRC can say? I wrote to my MP who forwarded the response of the minister thanking me for my concerns and pointing out that the estimated transition costs of £185m would be allowable as deductions against taxable profits.

But MTD will be so wonderful, because it will know when your client has a massive sales invoice in that quarter for the sale of his old truck, whether it has been subject to FYA or WDA and correct the postings from fixed assets to asset disposal and unicorns will do the journal entries.

Or if he hand-wrote that invoice at the time of the sale it will remember to create one on "the computer" for him.

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