The future of tax technology: Making Tax Digital
Read time: 8 minutes
Ian Bowden – Head of Tax Performance Engineering, BDO UK LLP
Ian has over 20 years’ experience in the tax sector. Now Senior Partner heading up BDO’s tax technology practice in the UK, Ian advises clients on how to use technology more effectively to manage tax, while providing insights into the latest developments.
As inveterate innovators and disruptors, tech business leaders are naturally interested in technology’s ability to positively overhaul every dimension of business activity, and even the often-daunting area of tax is benefitting from the bracing sweep of digitisation. Here Ian looks at how tech is helping to streamline tax via Making Tax Digital, and shares his insights into how technology can help tech businesses further optimise their tax management for the future.
To the non-specialist, the world of tax can seem complex and mystifying, subject to constant changes, updates and disruptions. But the increasing influence of technology and digitisation over this intricate space promises to deliver a long-awaited solution to some of the most fundamental challenges that fast-growing businesses may face in relation to their tax functions.
This forward-looking perspective is likely to be of especial relevance to tech businesses. Businesses that make their money from automation, digitisation and innovation, and have perhaps received grants and funding on that basis, will want to present a digital-first image to the HMRC in their tax arrangements also.
Take as example, the CFO of a tech company who has invested in state-of-the-art finance systems and is part of an agile, remote-working, cloud-based workplace environment. They will see clear benefits in being seen to be at the cutting edge in terms of the organisation, automation and de-risking of tax data as it moves between internal systems, tax returns and HMRC systems. Tech businesses that pay tax in different geographies may also benefit from more digitally harmonised systems.
Here, then, we assess the likely impact of the pandemic on tax issues for businesses in general and the tech sector in particular, and the imminent changes emerging in the tax landscape today such as HMRC’s Making Tax Digital (MTD) scheme. Finally, we’ll look ahead and seek to gauge how technology and automation are set to further transform the way tech businesses manage and approach tax in the future…
The impact of COVID-19 on tax technology
To understand the potential impact of COVID-19 on tax in the longer term, it’s instructive to begin by going back to 2008, the last big financial crisis and perhaps the most comparable case study we have for the prospective fallout that faces us today.
In 2008, the overriding trend in business tech following the crash was the huge increase in regulation on the banks. In the wake of the financial crisis, banks were forced into producing regular liquidity returns, and performing more frequent stress-testing and scenario-planning. They were also compelled to find ways to apply these extra regulatory restrictions on an almost daily basis.
As a result, banks began turning to technology to try and accelerate their capacity to deliver this increased regulatory burden without impacting efficiency. They began looking at automation for simple, small projects – bespoke builds that would deliver a rapid return and increased control within a regulatory environment.
Fast-forward to 2021, and we can see that COVID-19 is taking us on exactly the same journey. You only have to look at the prospect of increased corporation tax on the horizon and some of the fraudulent cases we have seen regarding furlough.
And so, once again, businesses are being forced to look at cost reduction. But this time round, the available tech solutions offer up far greater scope of opportunity for continued growth and diversification. This of course is particularly true for those in the tech sector, who will be affected in two key ways: increased risk as a result of remote working and the need to officiate and optimise new working models for this new virtual space.
Tax in the tech sector: a threat and an opportunity
First, as a result of the dramatic acceleration in virtual working, tech companies are already benefitting from new disruptive models of recruitment and human resourcing, for example by bringing in complete, ready-made teams of specialists, and/or drawing on newly global pools of talent and capability to deliver work that will be largely managed and delivered remotely.
Post-pandemic, tech companies will continue to invest in hybrid resourcing models which, while offering an obvious advantage operationally, will of course lead to increased risk and governance requirements to manage taxation for overseas workers. This will once again draw focus on the back-office costs of managing your tech company and how you stay compliant.
The second issue is more of an opportunity than a threat. The ‘new reality’ of this radically transformed working environment presents an opportunity for tech companies to optimise their tax function. Joining up the automation of key business processes is a no-brainer for disruptive businesses, both in terms of driving internal efficiencies and harmonising different geographies, but also in projecting an appropriate image to HMRC and other official bodies as a genuinely innovative, future-proofed organisation.
So if we can expect anything for certain from next year, it will surely be the beginnings of a race among tech businesses of all shapes and sizes to harness the future of tax technology, optimising their businesses for greater security and cost efficiency in the process. And any internal programme to apply digital transformation to tax will as a minimum need to embrace MTD, the UK Government’s own flagship initiative in this area.
At the end of last year, HMRC published its 10-year vision, looking to create a tax system fit for the 21st century. At the heart of that vision is a fully digital tax system that works close to real time, ensuring people and businesses pay the right amount of tax.
MTD for VAT, together with pilots of MTD for income tax, have already been rolled out. The next round for VAT requires a digital linkage between systems and how the numbers reach HMRC. And so to corporation tax (CT).
Just before Christmas 2020, HMRC circulated a consultation document to businesses on how MTD will be applied to CT; responses are due by March 5. One key area covered by the document is the possibility that corporation tax, statutory financial statements and provisions will all be required to be delivered at the same time. There's also the possibility of an increase in the frequency of required reporting to HMRC. This would mean, as one consequence, that those outside the Quarterly Instalment Payments programme (QIP) will have to provide a quarterly summary of their position.
"As many tech businesses that trade internationally may well know already, HMRC is hardly the world leader in the digitisation of taxation. In fact, many other countries have simply skipped these steps and jumped straight to full digital submissions, supplying digital copies of accounting systems and data to the relevant taxation authority and receiving back their tax references and bill in return."
Though the UK journey to fully digitised taxation is likely to be a little slower than elsewhere, the direction of travel remains inevitable. HMRC is obviously set on driving change, and sees digitisation as a means of closing the gap it currently perceives between tax paid and tax due. And in the time of COVID-19 and huge Government debt, recovering monies owed to the public purse has never been more urgent.
Preparing the way for MTD for CT
Many tech companies are already well under way on their MTD journey. The advent of MTD for CT looks like a radical development, but I would suggest taking a step back and considering strategically how to make the learnings you’ve already applied to VAT and income tax work for corporate tax.
Getting CT right will come down to establishing an alignment between when the statutory financial statements are being created, when the corporate tax return needs to be submitted, how adjustments are managed and how your provisions work. The provision, the corporate tax return, and the financial statements are all actually the same data, based on very similar calculations. So taking a holistic approach and considering these elements as parts of a whole – and deploying tech to help reduce some of the manual effort – can deliver significant efficiencies here.
To this end, and in preparation for the advent of MTD for CT, here are some key questions businesses should be asking now:
- What does my tax function look like at the moment?
- What is working well and what isn’t?
- How will my tax function need to work differently to fit the future?
- Where can I look to increase efficiency while reducing costs?
- What type of people do I need?
- What type of technology would help streamline my functions?
- Do I need to seek further insight and knowledge in order to find the best solution?
- What does the business expect from me?
- How can I add value?
There's a real opportunity here for tax functions within tech businesses to step up and start thinking more strategically about what their function needs to look like, and how tech can help them deliver greater efficiency and cost-effectiveness. Ultimately, MTD represents a direction to be embraced, even superseded, and who is better placed than a tech business to take that lead?
Innovations in tax tech
Finance and tax functions are ripe for innovation and disruption, not just through greater adoption and application of AI, RPA and machine learning, but – as we are already starting to see - in the increasing digitisation of revenue-collecting authorities themselves.
There’s no doubt that machines will replace more and more of the lower-level, manual aspects of tax and finance functions, especially repeatable compliance activities. But machines won’t replace people; rather, they will free us up to focus more on those higher-level aspects of our roles where human input is always likely to add value – creativity, insight, management analysis, negotiation, persuasion, complex problem-solving and critical thinking. While many of the fundamentals can be automated, high-value skills and capabilities such as interpretation and leadership will always be needed from tax and finance professionals – not to mention an understanding of the evolving possibilities of tax technology.
Get in touch
Interested in exploring how to transform your tax functions? We’d love to hear from you – email [email protected].
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