Overcoming challenges of digital tax reform

The future is dig­i­tal. What­ev­er issues tax pro­fes­sion­als have to wres­tle with, dig­i­tal­i­sa­tion is here to stay.

Mak­ing Tax Dig­i­tal (MTD), the UK government’s ini­tia­tive to trans­form the tax sys­tem, has been caus­ing headaches for small­er and medi­um-sized com­pa­nies through­out Britain. But how does the pro­gramme play out for larg­er organ­i­sa­tions? And how are tax juris­dic­tions oth­er than the UK chang­ing the inter­ac­tion between com­pa­ny and gov­ern­ment?

“The dig­i­tal­i­sa­tion of the tax sys­tem has been a long time com­ing and this will be a spur to invest­ment in dig­i­tal­i­sa­tion,” says Annie Gas­coyne, direc­tor of eco­nom­ic pol­i­cy at the Con­fed­er­a­tion of British Indus­try. “There are some sound rea­sons for com­pa­nies to do that. But this is a legal neces­si­ty dri­ven by reg­u­la­to­ry change.”

In the longer term, dig­i­tal­i­sa­tion will cre­ate effi­cien­cies. But there is still short-term pain

Giv­en that no invest­ment in reg­u­la­to­ry change will help boost cor­po­rate prof­itabil­i­ty, some com­pa­nies are being dragged unwill­ing­ly into dig­i­tal­i­sa­tion. Larg­er com­pa­nies with sophis­ti­cat­ed sys­tems and more employ­ees may not be suf­fer­ing in the same way as their small­er coun­ter­parts, which are typ­i­cal­ly hav­ing to engage with a whole new process of work­ing.

But sys­tems or staff are not enough to stop the pain when you are work­ing across nation­al bor­ders. “A com­ment that comes up time and time again is the pace of change, not only in the UK, but around the world,” says Ms Gas­coyne.

Tax industry is changing all over the world

The tax indus­try is chang­ing faster than ever before. Change is not sole­ly the pre­serve of the UK; reform has been under­way in the Unit­ed States for some time, while the Euro­pean Union has declared war on prof­it-shift­ing with its anti-tax avoid­ance direc­tive.

But the change is also dri­ving an increase in com­plex­i­ty; more than two years ago, the com­bined weight of the Char­tered Insti­tute of Tax­a­tion (CIOT), the Insti­tute for Gov­ern­ment and the Insti­tute for Fis­cal Stud­ies called for a com­mit­ment to a sin­gle prin­ci­pal annu­al fis­cal event in a bid to cut down on the pro­lif­er­a­tion of UK Bud­get mea­sures.

“This is a real bur­den on busi­ness,” says Ani­ta Mon­tei­th, tech­ni­cal lead and senior pol­i­cy advis­er in the tax fac­ul­ty at the Insti­tute of Char­tered Accoun­tants in Eng­land and Wales (ICAEW). “It is about chang­ing the way busi­ness record-keep­ing hap­pens. We’re not against MTD or dig­i­tal account­ing sys­tems; it’s the right way to go. But busi­ness­es are already under pres­sure because of issues such as Brex­it; they should be able to choose when the time is right.”

The time frame is a key com­po­nent of the pain felt by larg­er busi­ness­es. Typ­i­cal­ly a multi­na­tion­al busi­ness will plan its IT over a peri­od of, say, five years, but tax juris­dic­tions are bring­ing in reforms that demand change with­in one or two years. Com­pa­nies are hav­ing to adjust with­in a much short­er cycle, which inevitably affects cor­po­rate invest­ment, or ask­ing the tax depart­ment to do more, yet with the same resources, at least in the short term. Either way, dig­i­tal­i­sa­tion is soak­ing up a lot of com­pa­ny resources.

But the issue is about more than the fil­ing of tax returns, accord­ing to Dee Houchen, senior mar­ket­ing direc­tor at soft­ware com­pa­ny Ora­cle. “That is only a tiny pro­por­tion of the lia­bil­i­ty a com­pa­ny has,” she says. “Dig­i­tal­i­sa­tion is about hav­ing the con­fi­dence that the data behind the sub­mis­sion is cor­rect and trans­par­ent, and can sup­port the fil­ing you have made. And tax is the func­tion that has the largest data col­lec­tion behind it.”

Preparing the UK for more tax changes in 2021

Of course, in one sense com­pa­nies are sim­ply hav­ing to do what they have always done; com­ing up with the right num­bers is noth­ing new. But, says Ms Houchen, tech­nol­o­gy has changed expec­ta­tions of the speed of the process.

“We are still doing the same thing we have always done, but now elec­tron­i­cal­ly. That change in tech­nol­o­gy cre­ates the expec­ta­tion that we can do it more quick­ly or we are being asked to prove it more quick­ly. A lot of sys­tems haven’t caught up with that and com­pa­nies are real­is­ing they don’t have the abil­i­ty or a prop­er process to prove the num­bers,” she says.

More­over, expec­ta­tions are con­stant­ly ris­ing. Ms Houchen points out: “What we thought wasn’t pos­si­ble a few years ago is now pos­si­ble. We will end up fil­ing more fre­quent­ly; accounts used to be done with a month­ly close, but now work on a con­tin­u­ous close. Why should tax be any dif­fer­ent?”

MTD in the UK is cur­rent­ly only com­pul­so­ry for VAT, but David West­gate of the CIOT says organ­i­sa­tions should be prepar­ing for the next hur­dle. “Cor­po­rate tax is com­ing in 2021; it’s cru­cial to be invest­ing now in the soft­ware and skills you will need,” he says.

Unfor­tu­nate­ly both can be dif­fi­cult to find. There is a clear skills short­age in the indus­try; even tech­nol­o­gy com­pa­nies are strug­gling to find the right peo­ple, says Ms Gas­coyne. But multi­na­tion­als try­ing to stitch togeth­er a patch­work of sys­tems across a net­work of coun­tries, each with dif­fer­ent demands, face a heavy bur­den.

“There’s no sil­ver bul­let out there,” says Jun Miyake, prin­ci­pal in tax tech­nol­o­gy at Ryan. “There’s so much going on it’s dif­fi­cult for the soft­ware to keep up and the pace of change is such that it is pre­vent­ing soft­ware com­pa­nies from find­ing solu­tions that work for every­one.”

Global push towards digitalisation brings hope

Third-par­ty infor­ma­tion sup­pli­ers and soft­ware ven­dors are “cru­cial to build­ing a sys­tem that is effi­cient and pro­vides good val­ue”, accord­ing to the ICAEW’s report Dig­i­tal­i­sa­tion of Tax: Inter­na­tion­al Per­spec­tives. There are some signs that coun­tries are grop­ing towards a stan­dard­i­s­a­tion for the elec­tron­ic exchange of infor­ma­tion.

But even where stan­dards have been devel­oped, such as the inter­na­tion­al SAF‑T or Stan­dard Audit File for Tax, which was defined by the Organ­i­sa­tion for Eco­nom­ic Co-oper­a­tion and Devel­op­ment, they are imple­ment­ed dif­fer­ent­ly by dif­fer­ent coun­tries.

One ray of light, despite the need for coun­try-by-coun­try report­ing, is the glob­al push towards dig­i­tal­i­sa­tion may bring a new need for cen­tral­i­sa­tion, with shared ser­vice cen­tres that can serve mul­ti­ple juris­dic­tions and ensure fil­ing is con­sis­tent across all parts of the com­pa­ny. Ulti­mate­ly, com­pa­nies may be able to cen­tralise the tax func­tion in one loca­tion, staffed with a small­er num­ber of high-val­ue employ­ees whose exper­tise lies as much in data ana­lyt­ics as tax.

For many multi­na­tion­als, how­ev­er, such a con­clu­sion is a long way off. “In the longer term, dig­i­tal­i­sa­tion will cre­ate effi­cien­cies,” Mr West­gate con­cludes. “But there is still short-term pain.”