By Paul Trowbridge, Senior Regulatory Specialist, Sovos
In April, Making Tax Digital went live in the United Kingdom. With this new legislation, VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000 are now required to keep digital records and use software to submit their VAT returns for periods that started on or after the 1st April 2019.
With the pilot scheme over, many businesses getting ahead of the game by filing and many more due to sign up to the scheme in the next six weeks or so, HMRC will be under the microscope as to how it executes its MTD strategy. Advisers, software providers, independent bodies and the businesses themselves will all have their eye on how the scheme operates in reality.
The UK is certainly not the first country to mandate digital filing of VAT returns – in many ways, it is behind the curve when it comes to Latin America and a selection of other European countries.
Brazil in particular is an innovator in this space. Increasingly concerned in 2003 by its huge VAT Gap, fuelled by a largely cash economy, the tax authorities realised that—without change—Brazilian businesses would continue avoiding the tax man. To combat this, the government established continuous reporting on tax on an invoice-by-invoice basis – turning business-to-business transactions into business-to-government-to-business.
Fast forward to the last few years and there have been many countries that then followed this model to one degree or another. Hungary introduced real-time transactional reporting in 2018, while Spain adopted real-time reporting the year before. Italy then made electronic invoicing for domestic business-to-business transactions mandatory in January 2019. Others are following suit; the UK is in the middle of its Making Tax Digital (“MTD”) initiative, live from April 2019, while Greece and France have similar plans.
The devil is in the details
As previously mentioned, scrutiny will follow MTD throughout its infancy. Why? Because digital tax schemes being put in place are only as good as their implementation – look at the grumblings coming out of Italy in January as the infrastructure strained under the weight of implementing an electronic invoicing system.
But in the UK, there is a level of rigour underpinning MTD that stands to serve as a foundation to the service. The Government has implemented the service by supporting it through the Government Digital Service (GDS) and the Digital Service Standard. Both of these standards look to provide a modern and – in several ways – revolutionary approach to digitising tax. This can be broken down into four aspects:
Working with commercial software providers
HMRC published its Third-Party Tax Software and Application Programme Interface Strategy in 2015. This recognised the fact that taxpayers use commercial software and that working closely with software developers in order to develop richer and more robust APIs would ultimately lead to more choice and better solutions for the taxpayer.
HMRC are becoming more closer aligned with modern software providers through using the latest software design and development principles such as:
- Developer hub – allowing software developers to develop watertight APIs and to test their solutions in a virtual ‘sandbox’ before they go live
- Agile methodologies – a move away from traditional large-scale project management by breaking the project into ‘sprints’
- An API-driven approach – a clear agenda for the development of RESTful APIs built upon HTTPS
Over 300 software solutions are currently listed as being compatible with MTD for VAT, with a further 100 in development. This breadth of options is an indicator of HMRC’s success in providing choice for users and engaging with software providers.
Coding in the open
HMRC are also making all new source code open by publishing it on GitHub and Bintray, where it can be reused. This is an approach that they have coined ‘coding in the open’. This approach provides an approach that potentially other tax administrations could follow, having effectively laid out all of the related plans in the public domain. If the same systems are followed abroad, then a standardised API approach could be rolled out across various different countries. This would be a development that would aid international trade by ensuring that tax and VAT standards are met. This would be a huge development for companies with international supply chains.
A focus on user research
The first two points in the UK’s Digital Service Standard are the following:
- To understand user needs
- To do ongoing user research
This is very much aligned with the thinking and strategy surrounding modern software development. In the case of MTD specifically, HMRC have been actively undertaking user research with a range of stakeholders throughout the programme in order to garner feedback.
Interestingly, the final point of the DSS requires that any new service should be tested by the government minister responsible for that service. In other words, if the minister cannot use it, then the service is not deemed suitably ‘user-friendly’ and cannot go live. This is another key part of the process that other tax regimes may well be watching with interest.
Digital tax accounts – not just tax returns
One of the key messages which HMRC continues to emphasise in regards to MTD is that it is more than just a quicker way to submit tax returns. Instead, it is a vital cog in the Government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their financial affairs.
HMRC’s overriding goal is to provide all relevant financial information for an individual or business in one online location – the digital tax account. Significant progress has already been made with the Personal Tax Account in this regard, bringing together individual taxpayer’s details from disparate sources into that single location. As just one example, details of employment income are now automatically included in an individual’s digital tax account. That’s a system which would be of real interest to any developed tax administration in the world who doesn’t already have it in place.
At the beginning of the journey
Within the next few months, as more and more VAT returns are filed, we will be able to build a clearer picture of whether the UK’s ambitious plans to become one of the most digitally advanced tax administrations in the world remains on course for success. With the innovative thinking underpinning the scheme, the early signs are promising. And if it pulls it off, MTD could well provide the blueprint for digital tax administrations in the future.