The tax landscape is changing, and HMRC is investing significantly in their IT systems. As a result, clients must prepare for this new digital era.
When Making Tax Digital does finally come into force, it might actually turn out to be your lucky day. Whether this is for your first return post-1 April 2019 (or now post-1 October 2019 if you fall into the category of more complex taxpayers, such as VAT groups and those making payments on account) or even at the expiry of the so called soft-landing period on 31 March 2020.
After all, luck is not just about being in the right place at the right time, it is also about being open to and ready for new opportunities.
A new era for HMRC: The digital age
One thing that businesses dislike is uncertainty. Historically, the tax framework in the UK has been, at the very least, reasonably certain for business. This is changing and, with Brexit on the horizon, we have seen HMRC become more aggressive by raising a number of large VAT assessments. Disputes have always arisen but the current environment brings two key challenges:
HMRC is investing heavily in IT and is already one of the most digital organisations in the UK government, but its ambition is to be one of the most digitally-advanced tax authorities in the world by 2020. A number of other counties are also on the same path. For example, these countries are using SAF-T reporting, financial data submission and e-invoicing as a way of obtaining records of tax transactions and producing their own assessment of tax liabilities.
HMRC may say MTD is about transforming tax administration; making it simpler for taxpayers to get their tax right. But it's clear that businesses will need to look at their end-to-end VAT return compliance process to ensure they comply with the 3 “digitals”:
The direction of travel is very clear. Countries such as Spain, Hungary and Brazil already require some form of real-time reporting of transactions and others will follow. The Global Head of Tax of one of our clients has remarked that he fears tax authorities will soon know more about his data than he does.
Of course, the digital transformation by tax authorities is somewhat ironic when one of our most common gripes is around the failure of the tax authorities, courts and governments in updating their interpretation of the law (or even the law itself) to reflect advancement of technology. Whilst not limited to the financial services industry, this issue has been particularly prevalent when it comes to the application of the VAT exemptions, e.g. payment processing and financial intermediary services provided through trading platforms.
Preparation is key
In recent years, in-house tax teams have been forced to downsize as organisations come under greater pressure to reduce costs and transform. As part of this agenda, we have seen a trend towards outsourcing certain tax compliance processes (or even the end-to-end process) to both low cost jurisdictions and third parties. Whilst this presents an opportunity to generate efficiencies (assuming it is done correctly), the feedback from tax teams is that they lose both visibility and control of the end to end process but retain overall responsibility. The pressure remains to ensure that the VAT return compliance process is robust and that risks are addressed in a timely manner.
MTD will obviously force organisations to have another look at their end-to-end VAT return processes. This, therefore, presents an opportunity for those responsible for signing off the returns to critically assess how the current process works. Some of our clients are already asking themselves the following questions:
We all know that VAT is a self-assessing tax. But with the penalty regime and Senior Accounting Officer provisions targeting taxpayer behaviours through a lens of governance and control, it is clear that HMRC expects organisations to have suitable processes in place by reference to their size (both revenue and people) and prominence. MTD takes us one step further along, so now is the perfect time to strategically assess your future needs and invest in technology.
As a firm, we (KPMG) are not just speaking to our clients about MTD, we are doing something better – we are listening to them. We understand their needs and we have their wish lists.
I am excited about the new tech coming through – not just the standard partial exemption and compliance tools, but also the advanced data analytics that takes us to a completely new world by using machine learning. Just imagine the impact data analytics will have in dealing with the application of the reverse charge for tens of thousands of transactions – streamlining the process, reducing labour intensiveness and above all improved accuracy, a real game changer! A few years ago we thought that VAT was too sophisticated for Artificial Intelligence to play an important role in VAT compliance and I am delighted to see that this is not the case. However, we can't be complacent, as we fully expect HMRC to be making similar investments and, of course, they have a larger data pool to mine!
We are working with our clients to ensure that the huge strides being taken in technology not only bring efficiencies and improved accuracy, but also present VAT managers with insights previously not available to them.
Let us be open and ready for this new type of VAT opportunity and let us make our own luck!