Lessons can often be learned from history, and history tells us that following the 2008 financial crisis and subsequent bailouts, governments responded by introducing a raft of new legislation designed to increase the resilience of our banking sector. This included requirements for stronger governance, daily liquidity returns, strengthened balance sheets, continuous stress testing, and new tax obligations. Some of these changes were to help restore confidence in our financial institutions, but mainly they were there to recoup investments and reduce the risk of further repeated events.
To be able to manage these increased compliance requirements, banks had to find ways to be more efficient. Internal projects needed to deliver real value; cost reductions, risk reductions, and/or productivity improvements. Essentially, the banks needed to deliver more, and ensure their controls and access to real time management information improved. This required them to step back and focus on their strategy for technology, embracing the systemization and automation of many of their processes.
Fast forward to 2020. With almost every sector suffering as a result of the Covid-19 enforced shutdown, a much broader spectrum of the business world finds itself in need of financial help. The U.K. government has done a huge amount to address this, including loans, furlough payments, and boosting access to cash, but this support cannot continue indefinitely.
On the tax side, some new legislation has been postponed, and generous deferral periods have been given for payments. However, the signal from government is clear: whilst help is available now and for the next few months, tax obligations will not be going away, the journey towards a fully digitalized tax system will not stop, and the continued drive towards increased levels of self-governance and reporting will continue, perhaps at an accelerated pace. Are HM Revenue & Customs (HMRC) starting to show their teeth again?
The virtual failure of many seemingly robust household names has exposed weaknesses in how they have historically operated. Regardless of their size and market position, many companies do not have contingency plans in place for unexpected events of this scale. No firm is too big to fail.
Large and mid-sized businesses are well accustomed to dealing with HMRC’s increasingly demanding requirements for them to introduce more and more governance and control, but it is possible that this agenda will now broaden (in a similar way as it did with the banks), to add a “business resilience” microscope. HMRC’s starting point for this is likely to be where they left off with the banks, but could extend further, given what is known today: perhaps requiring businesses to evidence a minimum level of cash reserves or similar.
HMRC will be involved in any government response, especially given their ongoing focus on closing the “tax gap,” their desire to drive responsible behaviors for taxpayers, and the need to increase tax revenues. There will be an impact on tax functions.
Any increase in obligations will mean that tax functions will need to do more at a time when they may have implemented a recruitment freeze, or have actually lost headcount due to Covid-19. New ways of working will have to be introduced just to stay on top of existing compliance burdens. Tax and finance functions will need to consider their sourcing strategy carefully as part of their wider operating model, and consider where they can add most value to the business versus managed services or partner support.
With deferred obligations coming back into play, and already signposted changes being rolled out next year, we are all being pushed towards a fully digitalized tax system. Businesses will need to embrace technology for tax and make significant changes to the way they do things—in a similar way to how many of us have adapted to remote working. The digitization journey to date has been slow, but the pace of change is accelerating, and Covid-19 may well be the catalyst to finally force the change. It isn’t just the regulatory reporting that is on the list, there are more stakeholders to deal with than ever before; multiple internal clients, investors, third parties or authorities, all wanting a slightly different cut of our real-time tax data.
The latest generation of technology solutions is far more accessible, and does not require complex project plans or large budgets to gain a return on investment. The solutions often include elements of data transformation, data analytics and reporting and can quickly free up critical resource to focus on more value-added activities. This can include maximizing cash generating reliefs (e.g. research and development claims), and working towards closing open tax inquiries. It will also likely involve preparing responses to the expected increase in regulatory reporting, returns, and audit scrutiny.
A recent example of a small-scale technology enhancement saw us working with an SME to rethink how they executed a manual tax analysis process. The existing process took one individual a full three months of analysis work, but by leveraging one of these new technologies we were able to create a process whereby 95% of the analysis could be undertaken in under five minutes. This freed up that member of the tax team to focus their attention firstly on the 5% of transactions that were very complex, and then more broadly to work on other areas.
Unlocking the Advantages with Fit for Purpose Solutions
Technology can provide some significant enablers to help tax functions manage in the post Covid-19 world. Some of this will already have been in plans to meet the initial requirements of HMRC’s Making Tax Digital agenda for VAT, but those requirements will grow, corporate tax (and other areas) will follow. As HMRC seek to combine the way they assess and collect taxes through their digitized platforms, businesses will need to keep up.
Technologies should not be considered in isolation but should complement each other in order to achieve the end-to-end objective. Whilst small point solutions can be easily replaced if they are found to be failing to meet this objective, larger investments can be more difficult (and expensive) to throw away, so it is worth stopping and building a strategy. The latest emphasis in the industry is to consider how market standard software can deliver, but also considering solutions as part of a wider program; “best integrated rather than best in class.”
Understanding the limitations of existing systems and ways of doing business, as well as your broader strategy around technology will help you think holistically about what your tax technology strategy needs to say. Having a tax technology strategy is no longer a “nice to have,” it is critical.
Where to locate tax technology in the process must form part of this strategy. Quality data at source is the panacea to ensuring that information reported to stakeholders is correct, and it provides the basis for eliminating unnecessary manual interventions. Implementing relatively small strategic pieces of technology at source can have a huge impact on both finance and tax processes. These technologies can create immediate time and cash savings that could be critical as businesses seek to do more. The options here are broad, and many solutions are scalable.
In conversations with senior finance and tax leaders, we are already starting to see organizations looking to do things more efficiently using tax technology. Both in-house tax functions and outsourced tax delivery teams that have historically relied on Excel downloads from finance systems to provide the data for their review are starting to ask what technologies might help them reduce the cost of delivery.
These range from exports in prescribed formats, through to self-service access to finance systems for live invoice analysis, the latter being commonly available when using the latest cloud ERP technologies. Over the next few years, leveraging these types of approaches will become the “new normal” where outsourced tax delivery models are in play. These types of approaches can significantly reduce the external costs of compliance to a point where a business can commonly expect to see fee reductions of between 25–40%* (*based on the current commonly used Excel tax pack model).
What the Future Holds
The U.K. government remains focused on businesses having a comprehensive approach to tax governance and a delivery model which is fully digitalized. These two aims are inextricably linked, and businesses cannot detach one from the other. Starting, or restarting, the digital journey now is critical for businesses in order to not get left behind.
We do not have a crystal ball to understand exactly what additional obligations will hit our tax functions as a result of Covid-19, but when they come, it will just be another element that businesses will need to manage alongside their current day job.
What we do know is that history has a tendency to repeat itself. The lessons we can learn from the banking industry as a result of 2008 should be taken as a guide. Leveraging technology for tax to reduce cost (both time and cash), manage risk, produce better quality outputs, remain compliant, and to keep up in an ever-more digitalized tax system, has to be the goal.
Ian Bowden is Tax Technology Partner, Ian Bacon is Head of Tax Technology Delivery and Jason Land is Tax Technology Director with Governance and Controls, at BDO.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.