The future of tax

Making Tax Digital has brought the conversation about the digital transformation of tax processes forward.

While VAT has been the first to receive the mandate for digital record keeping and filing, other taxes will follow. The government has said that other businesses and taxes will not fall under MTD until after 2020, but income tax and corporation tax will likely be the next taxes to be mandated.

That news has been welcomed by accountants and the business community alike, to give time for MTD for VAT to bed in and for HMRC to iron out any teething problems.

Yet the use of technology to keep records and file them has far greater benefits than compliance alone. Automation can speed up processes, taking over time-consuming copy and paste tasks and ensuring greater accuracy.

Specific calculations which have proved difficult can be solved by AI, and improved with time using machine learning.

This could transform other areas including audit, which will no longer depend on sampling alone, while tax teams will be able to focus on making savings through relief claims and better forecasting.

“It’s about honing in on some of those problems that can be solved by technology,” said Russell Gammon, Chief Product Officer at Arkk Solutions.

Arkk solutions, which started in July 2009, specialises in regulatory, tax and financial reporting and is seeing rapid growth, as finance teams update their systems and reap the benefits of digitisation.

MTD for other kinds of taxes

The Spring Statement made it clear there are no plans to stick to the original timetable of rolling out MTD for other taxes from 2020. The process for VAT will be refined first.

At Accountex this year, HMRC’s Theresa Middleton said income tax was a priority for the tax authority, given that so many errors are made on self-assessment forms.

Corporation tax will also follow once the issues with MTD for VAT have been ironed out. But while MTD for VAT has served as an impetus for digitisation, many companies are not waiting that long.

“With corporation tax, 15 years ago, everyone used Excel,” said Russell Gammon. “Now, those over a certain size use software packages to deal with the problem, given the complexity of some of the calculations involved. We believe other taxes will follow suit.”

Mandates vs ROI

One of the reasons for that is that people can see the benefits of using technology, even when they aren’t forced to do so. Tax authorities may emphasise the need to close the tax gap, but for everyone else, the advantages of digital record-keeping and filing are in the business sense it makes.

“It has got to come from both sides – the technology has to be good enough to provide a return on investment, and then there have to be the mandates from various regulators to give it a sense of purpose,” Russell Gammon said.

“HMRC says they want us to become one of the most digitally advanced nations in the world, but then you look at some of the other countries and they are so much further ahead.”

He points to Spain as a country where the tax system is ahead as companies must file every four days. The complexity of the UK system presents a unique challenge, but many companies are jumping ahead when they can see the benefits technology can bring.

Tax teams becoming more central

For many finance teams, making this business case is critical if they are to win the investment needed to update their systems.

Arkk Solutions works on the business case with tax teams who are looking to implement new technology but need to win over their finance directors or CTOs first.

“We look at reduction in time, the reduction in errors, and the potential tax savings,” said Russell Gammon. For many businesses, tax has traditionally been seen as a necessary compliance issue but not necessarily an area where income can be generated.

“There are savings to be made with invoices too,” Russell said. “We have got an algorithm that will look at things like suppliers, customer names and customer IDs, country and currencies, and draw the relationship between them.

“The system will flag any that do not fit the pattern.”

Another advantage of having a system which automates reporting is that it becomes easier to forecast what the tax bill will be.

“One of the big things that we consistently hear from heads of tax, and their CFOs, is that they don’t want surprises,” he added.

As systems become more advanced, software can be used  to deliver sophisticated trend analysis, which will allow companies to spot problems long before they arise and prepare for them. This will bring the tax teams from the back office into a more strategic, central role which is also potentially more rewarding.

Will anyone still use Excel?

As finance teams move from entering data in Excel to keeping it in platforms which do many of the calculations for them, it would be easy to assume spreadsheets are set to become a relic from the past.

But Russell Gammon said there is still a place for everyone’s favourite Microsoft tool.

“It’s not going anywhere, but you wouldn’t run your entire business on Excel,” he said. “If you want to do an ad-hoc calculation, Excel is always going to be the best way of doing it, because it only takes half an hour.”

Where it will start to fade from use is in those companies where whole systems are being run on Excel, potentially incurring tax liabilities due to human error and wasting hours of manpower.

The human touch

Instead, the way forward is to integrate systems so that digital links can be made between different applications and tasks.

Those that fear their jobs may be taken by automation are probably being too pessimistic, however.

Humans will still be needed to interpret what the machine is telling them and decide on a course of action. Using a process known by Arkk Solutions as “Fix and Verify”, tax experts will review those transactions flagged up by the system, and either fix a mistake or verify that the transaction is in fact correct.

“At the end of the day, you still need that team’s expertise to understand what the system is showing you,” said Russell Gammon.

For those that are only beginning this journey, the first step should be to understand what risks they are currently exposed to and look at how technology may help to solve those.

“Ultimately, it shouldn’t cut headcount. It will redeploy those people to do more interesting work,” said Russell.