The changing face of tax: why the future is digital
Accountancy & Tax The digitalisation of tax may prove to be a headache for many SMEs — but it's happening around the world and coming to the UK, so every company has to be prepared for it.
The technological revolution has changed every part of our lives: even the way we submit our tax returns. You can run but you can't hide from this brave new tax world. In countries around the globe, paper filing is out (or on the way out) and digital is becoming the new normal.
“There's a strong trend away from the old world of self-assessment where businesses would file a summarised return once a year, once a quarter, or once a month,” says Kid Misso, Senior Director Solution Consulting at Avalara, the automated tax software company. “Now we're moving closer towards government assessment, and from periodic online filing to real-time filing.”
Take Spain, says Misso. From 1 July, the Spanish tax authority is introducing a new electronic VAT reporting system which requires businesses to send in their customer and supplier invoices within four days of their issue. Hungary is another example. “This year, the Hungarian tax authorities are rolling out an electronic invoicing initiative,” says Misso. “It means that before Hungarian businesses submit an invoice (with a VAT value of more than HUF 100,000) they'll need to contact the tax authority over a real-time connection to ask: 'Can I invoice my customer?' They'll then be sent a number which they put on their invoice. In effect, what the Hungarian authorities are doing is collecting transactions up front — a process that has been standard in Brazil for quite some time. It's very sophisticated and means that the tax office has all the information about a business's transactions, even before it submits a return.”
The reason for this is simple: in the EU, countries are losing billions in VAT revenues because of fraud, omissions and poor tax collection. “Last year the VAT gap in the EU was estimated to be around €160 billion,” says Misso. “There has to be a way of closing that gap, so they'll impose whatever mechanism they can to make it more difficult for people to avoid VAT.”
In the UK, the Government's Making Tax Digital initiative aims to transform the tax system and make it “more effective, more efficient and easier for taxpayers, through the implementation of a fully digital tax system.” What this means requires more clarity from HMRC; but, ultimately, the government's vision is for “the end of the tax return by 2020.” Previously, it was announced that most UK businesses would need to file their income/expenditure quarterly using an online digital tax account from April 2018. In the Spring budget, however, Chancellor Philip Hammond stated that non-VAT registered companies (ie, those with an annual turnover below £83,000) will not have to use the system until April 2019.
So could this advance towards digital be delayed further? Maybe, says Misso. “It's already had to change two or three times, so there's every chance it could get held up again. When the government brings in an electronic initiative it often takes longer to implement than they expect. Looking at the global situation, it's very common for these things to be delayed multiple times.”
But, he cautions, tax digitalisation is coming, so UK businesses have to be prepared for it. “Essentially they are going to have a choice,” he says. “They either have to work out how to file themselves and build their own technology and systems to talk to an HMRC gateway, or find a company with a solution for automating that process to do it for them.”
It isn't going to be pain-free. “I would say that businesses around the world are unanimously resistant to digital, because it means a cost for them,” says Misso. “It's a whole new process that requires system change and setting up from an IT perspective.”
Yet there are positives to automation. “The potential for errors in spreadsheets is alarming, yet some of the largest organisations in the world are filing VAT returns in this way,” says Misso. “Technology can speed up the process and remove all of those risks. And if you're selling across borders but don't speak the language of the country you're selling into, you might not be able to work out what your compliance obligations are and how to file a VAT return. In that situation, automation technology would be quite helpful — or, rather, essential.”
Avalara helps businesses of all sizes achieve compliance with transactional taxes, including VAT, sales and use, excise, communications, and other tax types. We deliver comprehensive, automated, cloud-based solutions that are fast, accurate, and easy to use. Our Compliance Cloud™ platform helps customers manage complicated and burdensome tax compliance obligations imposed by regional, and cross-border taxing authorities throughout the world.