Digital dilemma: to tarry or transform under MTD?

VAT is inherently risky, involving high data volumes and, primarily, quarterly submissions with tight deadlines. There are simply too many opportunities to ‘get it wrong’. It is this human capacity for error that HMRC plans to eradicate through digital means, with the digitalisation of VAT. It is hoped this will bring an end to the “failure to take reasonable care” and “error” responsible for £9.1bn (27.2%) of the £33.4bn tax gap reported for 2016-17.

However, Making Tax Digital (MTD) is also one of the main catalysts driving technology transformation and imposing change on business.

HMRC believe that MTD will make it “easier for customers to get their tax right”, with streamlined processes enabling the business to manage and meet deadlines, instead of incurring hefty surcharges for late submissions.

Some businesses will find the transition a smooth one, with their accounting software doing all the hard work. Others may prove resistant to change and slow to adopt software for VAT compliance. It is the latter businesses – as well as larger more highly complex businesses – that are most challenged by MTD.

Paths to compliance

Despite the obvious advantages of digitalisation, many organisations face a dilemma over how to respond to MTD, with the recent deferral for some 3.5% of businesses to October 2019 slowing the pace of change.

There are three possible paths:

• Take the minimal steps to meet obligations, by keeping digital records, preparing the return using a spreadsheet, and using a bridging solution to submit the return to HMRC via API-enabled software.
• Embrace full digitalisation by leveraging systems that enable the organisation to evolve as requirements tighten. This involves using an API-enabled bridging solution, combined with digital links to support the transfer of data from the digital record to the return preparation software/spreadsheet, once mandated.
• Transform systems and processes by investing upfront in technology and training, effectively building the foundations for compliance beyond MTD for VAT.

Furthermore, it is vital that businesses implement solutions that deliver wider benefits to save time and reduce risk, such as improved process controls, data validation, exception reporting, and analytics.

Given the tight timeline, implementing a solution that offers full transformation from day one may not be possible. Instead, taking a phased approach may be beneficial, by initially adopting a bridging solution, before carrying out a requirement review, conducting vendor selection, and transitioning by implementing an end-to-end compliance solution.

Some software providers may offer this approach as an upgrade path, enabling the business to spread the cost and smooth the change management process. This approach can also aid cost control, particularly if the vendor offers closely integrated compliance solutions that allow you to add functionality through the licensing of additional modules as your needs evolve.

Welcome deferral   

The recent mandation deferral to October 2019 for VAT entities with certain complex characteristics is to be welcomed, allowing time to plan and test new processes and systems during the pilot.

This, plus the soft-landing period, will allow more software vendors to enter the market, ensuring businesses can choose from a wider range of products with varying degrees of sophistication. It also provides organisations with the necessary time to tailor their processes and systems, with a view to supporting MTD obligations for other taxes further down the line.

The ideal scenario is to get to the point where your data is held in a single data repository from which you can populate your return preparation software for both VAT and corporation tax.

The data can then be pulled from disparate systems and unified in a common format to support data analytics, logical tests, and trend analysis, to empower and protect the tax function and business as a whole. This could be used to flag when the business moves from a payment to a repayment situation. Appropriate action can be taken to negate a VAT audit, for example.

Déjà vu

Technology as a force for transformation is not a new concept. In many respects, we have been here before; in 2011, for example, with the mandatory online filing for company tax returns, iXBRL accounts and computations.

Today 98% of company tax returns are filed online, conferring business benefits including greater compliance, convenience, speed, security, and accuracy.

Digitalisation shifts the burden of administrating taxes from HMRC to tax payers so that, whilst there may be overall benefits in adopting technology for business, there are significant costs, such as commercial software licences and the set up and training of staff.

Whether or not HMRC succeed in driving through the MTD agenda and businesses therefore reap the rewards of a digital tax system is yet to be seen. What is certain is that it is now up to businesses to make the most effective use of the next six months and the soft-landing period, by preparing for MTD for VAT and beyond.