The impacts of digital filing and collection of tax

Chartered accountant Androulla Soteri, global head of tax at Baker Tilly International, offers a progress report on the UK’s Making Tax Digital programme and other countries’ digital filing and collection of tax. The podcast episode was recorded in late 2019.

What you’ll learn from this episode:

• The current status of the UK government’s Making Tax Digital programme.
• Other countries’ progress on digital filing and collection of tax.
• What this digitalisation means for management accountants in business.
• Its effect on the business model of management accountants working in practice.
• How the digitalisation trend will affect skills, teams, and careers.

Play the episode below:

To comment on this podcast or to suggest an idea for another podcast, contact Oliver Rowe, an FM magazine senior editor, at Oliver.Rowe@aicpa-cima.com.

Transcript:

Oliver Rowe: Welcome, Androulla.

Androulla Soteri: Thank you. Thank you for having me.

Rowe: So, making tax digital. Can you describe the background to it, please?

Soteri: Sure. It’s a really interesting story, and it started four years ago, back in December 2015. And it was a quite radical approach that the government at the time, or most specifically George Osborne, who was the Chancellor then, was taking to revolutionise the tax system. And what he had in mind was this idea of abolishing the tax return, and that was quite a key tagline that he was quoting at the time. It was the fact that no longer would people have to go through this tedious process of once a year, filling in a tax return and submitting it to the tax authorities.

And that what they were going to drive was an approach that put everything through a digital system, so that businesses, self-employed individuals, landlords, were going to be expected to keep track of their tax affairs digitally through some kind of software — where at that time software didn’t include things like Excel, which we know is very commonly used. And that they would be expected to update HMRC at least quarterly on this information via their digital tax account.

At the time, David Gauke, who was the Financial Secretary to the Treasury, said this is going to make the tax system more effective, more efficient, and easier for taxpayers. They’re committed to £1.3 billion of investment at their back end, so that they can make their systems the most digitally advanced tax administration in the world. One of the most digitally advanced. And there were lots of reasons behind driving this. Actually, at that time and still today, you’ve got lots of territories across the world whose tax authorities [are] actually far more advanced in the process of digitalisation than the UK is.

But one of the key drivers here was a bit of recognition that there was a tax gap, and the tax gap is defined as the difference between the total taxes that HMRC theoretically expects to receive, and the amount that they’re actually receiving. And that tax gap was estimated in 2016–2017 to be £33 billion. And they believed that 41% of that was attributed to small businesses, so small businesses are responsible for £13.7 billion of that tax gap.

And then they sort of looked at that analysis in a slightly different angle, a slightly different light, and said well actually, £5.9 billion of it relates to taxpayers failing to take reasonable care when they’re completing their tax submissions, and £3.2 billion relates to errors. So that’s £9.1 billion altogether.

And they believed that was being done predominantly by small businesses, and that one of the issues was that because there was so much time that taxpayers were permitted to have between when an accounting period ended for example, and when they actually needed to submit their tax filings — there was so much time that everyone was leaving it to the end, that lots of errors were being made. That if people were forced to think about those filings in a more timely fashion, there would be less scope for them making those errors. And in part that that would help resolve part of the tax gap.

There was also at the time speculation that quarterly reporting was also going to lead to quarterly payments of tax, and that was very much indicated at the beginning. But as you would probably expect, there was outrage by the profession, by taxpayers. So when the government did finally release their consultation documents in August of 2016, there were six of them. And they were to do with bringing business tax into the digital age, simplifying tax for unincorporated businesses, things like voluntary pay as you go. Obviously, the fact that they brought that in was quite welcome. And transforming the tax system through better use of information.

When they did launch those consultation documents, I think it’s fair to say that everyone was quite relieved they weren’t going to be mandating quarterly payments of tax at that point in time. What I would say at this point, though, is I don’t think that’s off the table in the future. But no sign of it just yet.

Rowe: And what’s the current state of play, in terms of VAT, corporation tax, income tax?

Soteri: Again, it’s really interesting. Because if we think back to the original road map that HMRC set out, the plan was that it would kick off in April 2018, and it would kick off initially for income tax obligations. So that would be your unincorporated businesses, your sole traders, your partnerships. And it would be for those businesses whose turnover was above the VAT registration threshold. Except complex partnerships.

Then in April 2019, all remaining unincorporated businesses were going to come in, including your complex partnerships. And also VAT reporting was going to come in in April 2019. And then finally, April 2020 all corporation tax obligations were going to come in at that point in time. So you had sort of this staged process over three years.

Then, for various reasons which I’ll have a quick chat about in a moment, because again it’s quite interesting in terms of the backdrop. But in July 2017, the government announced that it would slow down the pace of mandation, and they wouldn’t be bringing the quarterly reporting obligation in for income tax first. They would be bringing it into the VAT first. And if you think about it, that makes sense. Already most businesses file their VAT returns on a quarterly basis, so in terms of a transition, that’s quite an easy transition to make. Or that businesses really needed to think about was how they were going to facilitate that transition through a digital platform, which was the demand the HMRC was and is making, essentially.

So, VAT came in earlier on this year — April 2019, as it was originally scheduled. And at that point, in July 2017 when they made this announcement, they did say right, we’ll do VAT April 2019 and then we’ll bring corporation tax and income tax together one year later, on 1 April 2020.

March, earlier on this year, the government further announced that they’d focus on the VAT side of things. They would not mandate income tax and corporation tax quarterly reporting in 2020 like they had originally proposed. Part of the reason being that they wanted to ensure that the system was working as it should, as expected, for VAT.

And of course there’s so many things that have come into play that have caused that delay at the same time as well. Firstly, I think it’s fair to say that the project was very ambitious on behalf of the government and on behalf of HMRC. HMRC was dealing with legacy IT systems that really needed to be brought up to speed, to cope with the volume of information they were going to be demanding from taxpayers, and processing that information.

At the same time, in April 2017, the government brought in IR35 public sector reform, which essentially meant that the way that IT consultants, they’re sort of self-employed in inverted commas, IT consultants were going to be taxed was going to change. And that was to the detriment of those IT consultants. So they decided to leave the public sector. So HMRC lost a huge bunch of their IT consultants, which put a delay onto the project.

And of course, feels like a bit of a dirty word now, but Brexit has had a huge impact on this. The government and the tax authorities have been distracted by the events of Brexit and how things are unfolding. So making tax digital to a certain extent needed to be put on the back burner.

Rowe: Could you give an overview, internationally, of how advanced is the UK and in what ways are other countries perhaps more advanced?

Soteri: So I think in order to answer that question, we need to explain the different levels of digitalisation of tax authorities that exist. And I would broadly say there are five levels of digitalisation. And they don’t work in a linear fashion. So you don’t simply progress from level one to level two to level three as a tax authority.

You can jump straight to a particular level. But broadly speaking, the first level of digitalisation is what we would call e-filing, which is where, the most basic form, where most tax authorities are. And this involves taxpayers filing their tax returns through standardised electronic forms. So, for example, in the UK, a taxpayer would log on to the Government Gateway, make their submission, job done.

Level two is what we call e-accounting. So this is where the taxpayer is required to make a submission of accounting information or other source information to support their tax filing. And they might be required to do this on a more frequent basis than just for example an annual basis. And just to put it into context at this point, that’s where the UK is right now. That’s all we’re at. Level two. Even with making tax digital, having come in for VAT, that’s still just level two.

You’ve got then the third level, which is what we call e-matching. And again, the original consultation documents that HMRC released a number of years ago [do] work towards this idea of e-matching. So, the concept of e-matching is that what the tax authorities are now doing is they’re also asking, for example, banks to provide information that they hold about taxpayers to the tax authorities. And again, level three is broader, so it’s the tax authorities demanding information about taxpayers from sources other than the taxpayers themselves.

And then what they’re doing is, they’re actually matching that data to the data that the taxpayer is filing with them as well. And doing a sense check, if you like. So this is called the e-audit level, if you like. And this is where the tax authorities are literally taking the information they hold and reconciling them entirely for a single taxpayer.

Now, those last two levels, they actually involve a fundamental change in approach to how the tax authorities are doing things, and how they’re expecting taxpayers and advisers to react. But what we’ve got with the fifth level is something that is entirely disruptive. And the fifth level is called e-assess.

And essentially what you’ve got there, and it’s very logical. If you think that the tax authorities now have information from you, and have information from third parties that have information about you, they no longer need you to tell them what you owe. They’re going to calculate your tax liability for you. And they’re going to raise a request for that tax from you, which they will then expect you to pay. And that’s quite disruptive to the accounting and tax profession as we know it.

So going back to your original question, where is the UK in all of this. Well, as I said, the UK’s at level two. And if you think there aren’t many territories around the world who are on level five. At the moment it’s really just Spain that we see as being at level five. And essentially all of Spain, almost all of Spain’s tax management has been addressed by the tax authorities.

So all five of those levels. And you know, you talk to sort of our counterparts in Spain, you know, they’re looking at a real shift in the way that they deliver tax services now. Because the role of the tax adviser has shifted from the preparation of the tax assessment to reviewing the tax authorities’ tax assessment to determine whether it’s in line with their expectations.

Territories such as Brazil, for example. They’re quite progressed also. So they’re at sort of this level four e-audit position. And Brazil had to bring that in, because it was their way of combatting corruption in Brazil. They recognise that there was an untaxed grey economy estimated to be around 39%. So the tax authorities there have gone as far as demanding that every business, when they raise an invoice, they have to submit that invoice to the tax authorities before they can send it to their customer to demand payment. And actually, they pay incentives to encourage taxpayers to do that, which is quite lucrative for the taxpayers.

So yes, it’s really interesting. UK’s only at level two. There’s many territories that are further ahead. But you know, you can very much argue that the pace of implementation is dictated by other factors that are going on in that territory also.

Rowe: Thank you. And for management accountants working in business, what are the challenges with this digitisation?

Soteri: So, this digitisation of tax specifically I think is a subset of cross-entity embracement of technology, OK. So, just as an example, just to home in on the tax side of things again. I think one of the challenges that businesses have, and so management accountants in business have, is that the tax authorities already ask quite a lot of questions, which businesses find difficult to answer, because of the way that they store their information and their data.

So, I think it’s fair to say that a lot of businesses, there’s still very prevalent use of Excel and standalone nonintegrated software packages. And that presents some finance function challenges. So for example, you get sort of redundant and email intensive data collection methods. There’s excessive time and effort spent on administration and manual tracking, dealing with multiple data sources and spending valuable time translating them into a common structural data definition.

There’s a lack of visibility and oversight of deadlines, specifically tax deadlines, deliverable status, and resource allocation. So you’ve got this situation where tax data and data generally to do with the business is hidden all over the organisation, whether it’s in systems operated by ops or marketing or finance. So, one of the big challenges that finance functions face is that they need to embrace technology a lot more. And they need to invest in really robust enterprise resource planning systems that can collate this information from all the sources and process it effectively onto a dashboard that’s very user-friendly.

There has been a real refocus of boards on making tax functions operate at a more strategic level of late as well. So, boards are expecting, for example, tax functions to give more precise estimates of tax cost. That will help with cash flow management, for example. It will provide greater business insights, so it will optimise decision-making. And there’s therefore a real need for these kinds of dashboards, in order to communicate these things to the boards, in the visual way that they like to see it now. And obviously the most cost-efficient way to deal with this is to embrace the technology that is being built in order to manage this.

Rowe: And the opportunities, the reverse of that. What’s the opportunities for management accounts working in business?

Soteri: Well, I think it makes the job more exciting, to be honest. Automation means that the slightly mundane tedious tasks of preparing reports, budgets, commentaries, financial statements will happen at the click of a button rather than through this really time-consuming slightly automated, slightly manual process, because we don’t have full automation in place by and large.

So, and then what it means is that the traditional role of the management accountant can be done in virtually real time, as a function. So you become more valuable to the C-suite of your organisation. And because of that sort of very timely valuable insight that you’ll be able to provide, you’re quite likely to be asked to be more involved in the strategic development process of that organisation.

So, for example, there’s been a big trend over the last few years of the merger of the tax function and treasury under the responsibility of the CFO. So, there’s a bit of recognition that there’s the automation and technology has enabled us to bring together some functions, so that they can work more closely together, making things more efficient and giving greater, more timely insights into what’s going on in the organisation.

So it’s a door opener in terms of someone’s career, I think. But what we do need to ensure, and it’s all professions involved in this process. We need to ensure that there’s other skills we’re developing at the same time that don’t just focus on techie skills. And by techie skills I mean, you know, those things that we go and sit exams for and get a professional qualification for. It’s no longer about that. There’s some real soft skills that we need to be developing and demonstrating, so that we can join that process rather than be left out of it.

Rowe: And for management accountants working in practice, what are the implications of this digitalisation for their business model?

Soteri: So it’s the business model of practice altogether that I think, where there’s a really huge challenge. And the role of management accountants in practice will be impacted by that. So, you know, if our government is looking to achieve a level five of digitalisation, we’re ultimately talking about our tax authorities telling our taxpayers how much tax they’re going to pay.

So where you’ve got professional service firms that have a heavy reliance on compliance taking up their fees, and that compliance can be tax compliance. But we’re also talking about bookkeeping. We’re also talking about payroll. We’re also talking about the management accounts side of things. When we are now saying that our margins are going to be entirely squeezed on that, that entirely changes the business model of professional practices.

So compliance, we’ve got to prepare for the fact that that pretty much is going to go out the window in the medium term. Business are very much going to embrace dealing with their own financial management as well, so they’re not going to outsource that to advisers as much, because they’re going to be competent to deal with that. Because of that lower reliance on compliance services, we need to start thinking about ways that as a business, we can start delivering these services at a cheaper rate so that we’ve got the less reliance.

And again, that’s all about embracing technology. We need to move towards more strategic working models, so appreciate that advisory services really are going to have to be what we rely our income to come from. And in order to be able to provide those advisory services in a way that clients demand, and they’re already demanding it this way. They no longer want a reactive service. They want a proactive service. And in order for advisers to be proactive, they need to be consciously looking at all the data they hold about taxpayers, and thinking about what story it tells and what tax advice that they can proactively give their clients in order to save them money essentially.

I’m reading a book at the moment that’s really interesting. And the authors are a father and son duo called Daniel and Richard Susskind. And the book is called The Future of the Professions. And one of the things they talk about in this book is this concept of disintermediation and reintermediation. Which is all about the role as a professional being displaced as part of the supply chain, because of the introduction of technology, and how we need to embrace that and accept that we need to change the way that we operate, and redefine how we do things and reintroduce ourselves into another part of the supply chain.

Rowe: That’s fascinating. And you talked, Androulla, about skills a bit.

Soteri: Yes.

Rowe: Perhaps you could say a little bit more about skills and how they will need to change.

Soteri: Well, I think that all people that provide professional services, whether it’s management accountants, chartered accountants, certified accountants, tax advisers, lawyers, we’re bookworms. We love to have our head stuck into the rules that we then apply. And I’m not saying that those technical skills are going to go out of the window. I’m saying that, in the past, a real big focus of our makeup was those technical skills.

The future accountant is, that’s just going to be, I don’t know, 20 to 25% of what’s going to make them up. The future professional’s really going to have to embrace technology, and data analytics as part of what they do. So it’s no longer going to be a case that we turn around and say, well, that’s something that’s the domain of the IT department, or I’m not really comfortable with this side of things, so I’m going to leave that to someone else. We really need to embrace that as part of the process of delivery of services. Business acumen and soft skills are going to be really key.

There’s a real demand now from us as professionals to be able to explain our profession, or what we’re doing in the delivery of our services, in sort of layman terms in a way that people understand. And there’s a real skill to doing that. So, you know, that’s something that does need to be developed. Problem-solving and process improvement. One of the really interesting things about, or one of the interesting challenges that I’m seeing about how, as a network, we are embracing technology, is the fact that you’ve got the technology guys on the right. Let’s say, you’ve got the IT geeks on the right. And then you’ve got the tax audit advisory accountant geeks on the left. And they each speak their own language really, really well, and they understand their profession really, really well. But what we’re asking from them in the future is to come together and communicate each other’s profession to each other to develop a solution that is fit for purpose.

And project management is the last one, and that ties quite nicely into the last couple that I’ve mentioned.

There are going to have to be projects that management accountants engage with, with the IT guys to make sure that whatever processes or systems are being brought in are working in the way that it is expected they should work. And that is a real team effort. There is no longer a case that one party can delegate to the other. It’s going to be real teamwork.

Rowe: So in terms of teams, what about team structures? Are they going to change as well?

Soteri: It’s a really interesting question. And fundamentally, the answer is, well, yes, they’re going to have to. This book that I referred to earlier about the future of the professions, it talks about the end of the professional era as we know it, and how that’s characterised by four trends. And I think it’s really interesting to talk about those four trends.

So they talk about this move away from a bespoke service. So, we like to think that our profession, we’ve studied many years for it. Every bit of service we deliver to our clients or whether our client is a traditional client in practice or whether the client is our C-suite when we work in industry. Whichever one it is. But we deliver this bespoke service to them. And that’s no longer going to be the case with the professions. We’re seeing the routinisation of significant elements of professional work. We’re seeing things being conducted more and more by teams, where not everyone in that team is necessarily qualified or holds the qualification that you would normally traditionally expect them to have in that team.

We’re known as gatekeepers of our profession. So this is the second trend that they describe. Being gatekeepers of the profession. And again, we’re no longer gatekeepers of our profession, because our professions are being encroached upon by nonspecialists. And we need to react to that. And then there’s this shift from a reactive to a proactive approach to professional work, which I spoke about before. The traditional way of dealing with this is that the recipient of the service initiates an engagement and then the professional responds. So what we’re basically demanding is that the burden of recognising that professional help is required lies in the hands of the inexpert.

So, for example, let me take this back to tax, because that’s where I specialise. But you know, you get a client. You have a client. They get a threatening letter from the tax authorities. The recipient of that letter, your client, very stressed about it. They’re not sure quite what to do with it. They try and fix it themselves, and actually what they end up doing is making a worse situation of it. And then they finally come to you for the professional help at the point where the problem has actually quite escalated quite unnecessarily. And what you’re doing is fighting fires. So you’re reactively dealing with the issue.

And what clients, and as I said, that’s clients from both angles, whether your client is the C-suite that you work for, or it’s clients in practice. They’re expecting us to be a lot more proactive in the services that we provide. And actually, our ability to do that very much depends on the quality and quantity of information that we hold in order to engage in that level of proactivity. So we need to be really on top of our data, and that’s where technology comes in again.

We’ve also got the “more for less” challenge, so that’s the fourth trend that characterises the shift in the professional era as we know it. So, all in all, businesses have less money as we’re seeing. But they’re having greater need for professional help. So we need to find ways of delivering more professional service at lower cost.

So let’s now start thinking about our teams. In the past, our teams would almost entirely be made up of qualified professionals. And actually, what we’re seeing is a bit of a trend towards or a shift towards what we call para-professionalism. So, we’re delegating elements of the process down to individuals that are not necessarily experts in the entire process, but are very efficient in dealing with one particular process. And as such, you’re able to deliver the service overall at a much cheaper rate.

Generally speaking, though, I think the way that we are looking to train our professionals going forward is going to change, and that very much does affect team structures, but consistency in teams as well. So I think what we need to start embracing a lot more of is things like rotations, cross-department rotations. Let’s get our management accountants out of their day-to-day management accountant role, and let’s get them into the IT function for a couple of months, so they can really understand how that works. And then they bring that back into their finance function role. And vice versa as well.

Let’s think about training. Yes, it’s really important to have that technical training up to speed. But we’ve really got to start focusing on some of those soft skills. Communication is going to be really key. Relationship building is really key, in order to progress forward.

And I think again, historically what we’ve done is we’ve very much focused on qualifications when we’re looking at the individuals that we recruit into our teams and develop through our teams. And I’m starting to believe the qualifications are going to be of a lesser importance in recruitment, as focusing on things like, what are someone’s strengths? What are they really good at? What did they identify as being something they are really good at? And how can we use that strength to better our organisation?

Rowe: Thank you, Androulla. And what about some takeaways from our conversation today, for management accountants? What would be your top three?

Soteri: OK, that’s really simple to answer. The first one I would say is, I would describe it as compete or build. So we are threatened by technology as professionals, because it feels like technology is going to take our jobs away. And we’ve got a choice. We can either try and compete with the technology, which we’re never going to be able to do, because it will be able to do things better than us, and far better than us in the future, because it’s becoming more sophisticated. The rate of sophistication is far greater than what we could ever have imagined ten or 20 years ago.

So we can compete, can try and compete. Or we can get involved in the process and build these systems. Join up to build these systems. But what that does mean is that the definition of our role is changing.

So this brings me on to number two, which is, we’re going to have to redefine our skills. We generally as professionals will have a skills gap now, in terms of how our profession is changing in the future. We need to think progressively about where the gap in our skills are, and fill that gap so that we can adapt to this technology-based society that we’re moving towards, or that we’ve moved towards and continue to move towards.

And I’d say the third one is just embrace it, OK? We can’t fight it. This is happening. I’d say, out of all of the professions, the accountant profession is probably one that’s actually quite far behind in terms of embracing technology. If we think about where the legal profession and even the medical profession has progressed, because they’ve embraced technology the way they have. You know, people are having surgery not conducted by surgeons as individuals, but conducted by robots, and the accuracy of that surgery is far greater than an individual that might have been doing that. There’s no reason why our profession is not going to be impacted in the same way. So let’s embrace the new era of the profession and adapt to deal with that.

Rowe: Thank you, Androulla. Thank you very much indeed.

Soteri: You’re welcome.