Since the government announced its Making Tax Digital (MTD) initiative in 2015, businesses across the UK have been working to ensure they meet the new regulations set by HMRC.
In its own words, HMRC says MTD will help it “become one of the most digitally advanced tax administrations in the world.” Yet, many countries are ahead of the game. Mexico, Spain, Italy, Brazil and others already have digital tax systems in place, with many being stricter and more advanced than MTD in the UK.
There is also a disparity between businesses in the UK. While some have struggled to adapt, those that are more digitally able are working well beyond the MTD requirements of submitting periodic VAT returns. They are finding new ways of working, with new systems in place that enable real-time working and in-depth tax analysis. Thus, is MTD a solution to an old way of working?
What problem is MTD trying to solve?
Unlike some countries – Brazil is one – MTD’s main goal is not to combat fraud. Rather, HMRC intends to reduce the number of errors made in tax returns. Brian Palmer, Managing Director of Tax Policy Advice, said: “MTD in the UK is there to reduce errors in the system. It is not there to tackle fraud, per-se. That’s why HMRC has gone the way that it has. In somewhere like Brazil, the supply of information is more or less real-time and is there to reduce fraud.”
HMRC introduced MTD to establish a digital foundation in its tax regulation. Businesses have already felt the benefits. The first six months of MTD compliance generating £815m for SMEs in productivity gains.
The findings also highlighted an increasingly positive attitude towards MTD since mid-2018:
- Three in five businesses now favour MTD being applied to other forms of tax
- Over half believe a wider roll out would save them time and increase productivity
- Two in five businesses see MTD as having provided them with a more accurate view of their company’s finances
- A third say switching to MTD compliant processes has not been complicated
Catalyst for change
Demian De Souza, partner and Deloitte and lead of the firm’s tax compliance and technology group in the UK, says that MTD has been a force for change.
“Considering MTD, or VAT as a catalyst, it’s been a positive force for change among our clients,” he says. “For any business that has had an aged, creaking VAT compliance process, that has had a key person dependence or spreadsheet dependency built into it, then MTD has been a real catalyst for reassessing what good looks like, and taking positive steps towards making the process more automated, more standard and more efficient.
“That then leads to the question – what technologies are they using to make that happen? We’re seeing greater flexibility in the tax technologies available, so the tools that allow you to dispense with excel are getting better. There’s a great adoption of generic data automation tools.”
Shaun Shirazian, Director of Product Management at Intuit QuickBooks UK agrees: “It’s important to recognise that MTD has played a significant role beyond improving tax administration.
“Once a business sees the power of digital to improve their business in one area, they are far more likely to pursue those same benefits across their operations. For this reason, MTD has been a catalyst for digitisation for many small businesses, resulting in major productivity gains – which could be as much as £57bn in the next five years.”
MTD has affected accountancy firms much in the same way that it has businesses. Clients who are making efforts to digitise demand the same from their accountants. But this goes beyond complying with MTD. Accountants have had to reassess their own role, processes and technologies to align with clients.
Good use of technology, in theory, will enable firms to focus their time on areas away from compliance and more on advisory services. But this is not as simple as introducing new technology.
According to Shirazian, accountants can ensure their clients are aware of what technology is available to them: “Accountants can play an indispensable role in highlighting the myriad opportunities digital has to offer, but the learnings from MTD are clear: businesses need to see the benefits to believe in them.
“Our MTD sentiment tracking research has shown this – with the number of businesses more likely to say MTD has a positive impact on their business, increasing by 32%, once adoption and use was more prevalent.”
New ways of working
The MTD mandate has put the onus on businesses to digitise their tax processes. This has resulted in many going beyond that and working in ‘new’ ways with tax. Does this mean the problem that MTD was introduced to solve is less pertinent?
Tom Gilbert, RSM’s VAT Technology Lead, says: “An argument against MTD is that you are still submitting the same 9 box VAT numbers electronically, just in a different way. This fundamentally misses the point as to why HMRC has introduced MTD instead of taking an alternative real-time reporting or e-invoicing approach like we have seen in Spain, Hungary, Italy and likely more countries soon.
“The use of machine learning algorithms to verify and check transactions is also starting to be adopted, albeit this is at an early stage and typically included with dedicated VAT return reporting platforms.”
Firms can utilise a variety of technology. AI, encompassing Machine Learning and Robotic Process Automation (RPA), cloud accounting and real-time data feedback are all in use by firms to make tax work more efficient.
This technology will free accountants from the more tedious tasks, enabling them to spend more time on advisory services. It will also improve accessibility and transparency between businesses, accountants and, potentially, HMRC and other tax authorities in the future. For businesses working across borders and with different regulations, this can be particularly important.
Laying the foundations
Some, however, feel that MTD is not a solution to an old way of working. Rather, they say it is laying the foundations for businesses that are not as technologically advanced, which can now begin implementing more powerful tax technologies.
Colin Hewitt, founder and CEO of cash flow forecasting app, Float, says: “I don’t think MTD is a solution to an old way of working. MTD is preparing the ground for reporting taxes much more closely to when they occur for the business. It should hopefully move businesses and bookkeepers to digital bookkeeping and reporting.
“There will be those who think MTD doesn’t go far enough, but it’s important not to challenge businesses to run before they can walk. The current form of MTD is a necessary first step to ensure that every business in the UK is brought up to a minimum digital accounting standard and no business is left behind.”
Regardless of where their clients sit, keeping up with tax technology represents a real opportunity for accountants. It will enable firms to work more efficiently and add value to their clients, increasing profitability.
Gunjan Tripathi, Senior Proposition Manager of Indirect Tax in Europe at Thomson Reuters, says: “As the compliance processes get more efficient, and the practice has access to reliable real-time data, the opportunities for advisory and other value adding services should not be underestimated. Getting the foundations correct now, will benefit both client and accountant in the future,” she says.
“Perhaps one unforeseen outcome of MTD is that not only are client relationships strengthened by the improved approach but also accountancy firms who successfully understand and adopt the right technology and processes for digital tax gain a competitive advantage.”
The future of MTD
It is unlikely that HMRC will begin a new phase of ‘Making Tax Digital’ any time soon, with the next stage occurring in April 2021 at the earliest. There has been no sign that the UK’s tax authority will be looking to install a system like those in Brazil, Spain, Hungary, Italy and more.
Some feel that more reporting to HMRC isn’t the right way to go, and the focus should be on ensuring businesses are on the same minimum level.
Viktor Stensson, CEO and co-founder of Swedish AI-based accounting tool Bokio, says: “I don’t feel more regular reporting to HMRC is the answer. MTD for VAT is a great start as it encourages users to use cloud-based software which is more secure, reliable and can offer easy collaboration.
“Accountants can encourage their clients to set up live bank feeds with accounting software. They can give their clients access to accounting software to see reports in real-time and hence be more proactive and forward-looking. Using cloud-based software makes processes more efficient, meaning that accountants have more time to spend on more important tasks with a higher profit margin, such as tax advice.”
While technology could well make the problem MTD is looking to solve redundant, the system of submitting periodic tax returns remains. MTD has, however, resulted in several businesses and accountants advancing their tax technologies to realise the benefits they can bring.
