The global switch to digital tax has begun: Are you ready?

In April 1 next year a new era begins in tax. HMRC will require that VAT returns for registered businesses with turnover more than £85,000 are filed electronically, using specialist software. The initiative, known as Making Tax Digital, or MTD, is the first step in a process with ambitions to switch all corporate taxes to filing via software.

Many businesses are underprepared. A recent survey by EY of 1,300 tax professionals, including heads of VAT, tax and finance functions, found nearly 50 per cent have not yet started planning for MTD and are only “somewhat confident” or “not confident” of meeting the deadline.

“The lack of action is worrying,” says Charles Brayne, head of the tax technology and transformation practice at EY. “You have to be ready. No excuses. If you don’t act now, you may not be ready for the deadline.”

The current rate of improvement is slow. In June, EY asked delegates on its Making Tax Digital webcast how many were “extremely confident” and equipped for the new system. Only 4 per cent said they were. EY asked again in early-September. The number had risen to just 6 per cent.

There are obvious reasons why companies are struggling to implement the changes. There are distractions, in the form of Brexit, and other market reforms. The information can be fragmented across departments, with significant dependencies on the IT and finance functions to ensure compliance.

“MTD has three requirements,” says Mr Brayne. “First, having digital records. Most large corporates and mid-sized companies will have this already. Second is being able to submit VAT returns to the HMRC portal, using compatible software. There are a number of solutions you can buy and are listed on the HMRC website. This is a relatively straightforward implementation. Third is the ability to record the entire digital journey with limited manual intervention, from initial input into digital records through to submission. This is the most difficult step.”

HMRC is offering a degree of leniency on this last point. It has declared a soft-landing policy. The deadline for compliance won’t be moved, but there will be a 12-month period of grace so long as companies clearly demonstrate they have a plan in place to record the full digital journey. Figures from EY suggest a third of businesses remain unaware both of this policy and its purpose.

The call to action is particularly significant as MTD is merely the first step on the road to digital tax. HMRC plans to extend digital submission of returns via specialist software for income tax and corporation tax. The trend is international. Tax authorities around the world have moved quickly to integrate new technologies within their approach to revenue assurance and enforcement. HMRC’s aim is to become a market-leading digital tax authority, but many are already ahead of HMRC in terms of their implementation of a truly data-driven compliance regime.

“This is a real chance for companies to take a step back and think about their processes around tax,” says Mr Brayne. “If done correctly, preparing for MTD in April can be the start of a wholesale transition to being a digital enterprise.”

There is significant assistance on hand to make the process easier. Outsourcing entirely to a digital tax specialist is an option. This partner will already have the software, hardware and processes to allow for a rapid transition.

“Certain businesses outsource to us,” says Fiona Campbell, EY associate partner, indirect tax. “If needed we can handle the implementation. Alternatively, for clients who want to retain responsibility, we have solutions they can use; these are scalable according to our clients’ needs and particular circumstances. These solutions provide extra control, but ensure they use reliable software and processes. A third option is to use our managed service called EY Absolute. It runs everything from transaction processes to submission.”

Business may try to go it alone. But the early signs are that this is a sizeable burden to undertake without assistance. When asked by EY in June for their main concern with MTD, 40 per cent of companies said understanding technology and 30 per cent cited reliability of processes.

Ms Campbell advises: “To help identify and alleviate concerns over technical requirements and reliability of processes, businesses should conduct a gap analysis of where they are currently, and what actions and investments are needed to make their business MTD compliant.”

In the short term, MTD will be seen as a cost for business. “But there are upsides too,” says Mr Brayne. “Companies will have better visibility around cash flow, risks and transactional analytics. The more data you have the better and while people aren’t necessarily seeing it as a positive now, when it’s up and running they could do.”

As an example of the potential benefits, he points to the increasing adoption of machine-learning and artificial intelligence tools, which can scan and review tens of thousands of lines of tax entries looking for errors, including overlooked allowances. The use of intelligent software to produce a company’s tax return in this way will quickly become routine, he says. Data integration will be radically improved. Digital tax is at the heart of this.

“The headline message is this,” says Ms Campbell. “You have to be ready for the April deadline. Don’t underestimate the amount of time it will take. You may be surprised. But there’s a positive message too. Savvier businesses will see this as an opportunity to think about future changes. The switch over the longer term is across multiple taxes, across multiple jurisdictions. If you develop a strategic plan, you can be a winner. But you have to take action now.”

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