As digital change continues to impact industries globally, with new technologies and innovation disrupting traditional business models and processes, the time has now come for tax to digitise.
Across the world, governments are pursuing better, faster and more accurate tax compliance through greater transparency, increased efficiencies and more frequent reporting. Digitising and automating the tax compliance process is widely seen as a key step in making non-compliance easier to detect and address – it is also a politically popular way to increase tax revenues without increasing tax rates. For companies offering software and services in the tax and data automation arena, this regulatory transformation creates significant opportunities for growth.
Latin America leading the way
So far, Latin American countries have led the way in real-time digitised tax compliance, largely as a result of the need to tackle a pervasive problem of tax evasion. Chile introduced an electronic invoicing system back in 2003, and was then followed by Brazil, Argentina, Mexico and Colombia.
Electronic invoicing essentially requires all businesses to operate an e-invoicing system that submits real-time updates to the tax authorities, providing them with full visibility of transaction information. As a result of digitisation, Mexico increased its VAT collections by over 30%.
Meanwhile, in Europe, countries like Poland and Italy have been early adopters of digital taxation. Poland was one of the first to adopt real-time electronic reporting in 2016, with the VAT gap in the country falling from 24% in 2015 to less than 14% in 2017, according to the Polish Economic Institute.
Bringing digital tax to the UK
The UK is now catching up. Her Majesty’s Revenue and Customs (HMRC) estimates that £35 billion of tax revenues were lost to non-compliance in 2017/18. To put that in perspective, that amounts to well over two times the Government’s annual spend on the police force or half the annual spend on primary and secondary education. This ‘tax gap’ is a result of evasion, the hidden economy and reporting errors, with more than a third related to businesses making avoidable errors often associated with manual record keeping.
Making Tax Digital (MTD) is HMRC’s initiative to digitise the UK tax system. Earlier this year, the first phase of the MTD project was launched in the VAT area, requiring businesses with taxable turnovers greater than £85,000 to file their VAT returns using MTD-compatible software.
This initial phase is, however, only a ‘soft landing’ before the second – arguably more important – phase is introduced next year, when businesses will be required to have full digital processes in place from source to submission. After 2020, MTD will likely be rolled out to other areas of tax, including corporation tax and income tax.
While MTD may sound revolutionary, it is just part of HMRC’s long-standing tax digitisation agenda that started in 2000, when it was mandated that all tax submissions be made online. Ten years later, in 2010, the government required a specific reporting language (XBRL) to be used to drive more automated and efficient processes. Both events changed the tax compliance landscape and created significant opportunities for software and service providers to help customers transition and comply. MTD is now the next step of this digital journey in the UK.
MTD will create opportunities for tax innovators
We believe we are approaching a period of significant tax and ERP (Enterprise Resource Planning) software growth, with MTD expected to more than double the size of the UK’s tax software market over the next five years. Tax is rapidly moving up the boardroom agenda and, rather than being siloed, now needs to be fully integrated into wider ERP systems and business data processes.
The implications of MTD reach further than one might expect, fundamentally changing long-standing tax audit working practices – where compliance is carried out after the fact – to new forms of continuous real-time compliance. That creates opportunities for more value-added work for tax professionals, who until now have spent up to 75% of their time on manual data collection, entry and manipulation work.
Tax Systems, which serves over 1,000 large corporations and accounting firms, has developed solutions that can automate the end-to-end tax compliance process, enabling clients to increase the accuracy of their tax reporting, reduce the risk of non-compliance and free up the tax function to focus on value-adding tasks.
Because of its established reputation, Tax Systems is well-positioned to help customers on their MTD journey, having launched two new products earlier this year, AlphaBridge and AlphaVAT. The first is an MTD-compliant bridging software solution that allows customers to digitally submit their VAT returns, whilst AlphaVAT is a cloud-based compliance engine that can give customers full control over the preparation, calculation and management of VAT compliance.
Tax Systems also has a suite of data collection and automation software tools that offer customers the chance to create a full end-to-end solution as they grapple with their tax digitisation journey.
Strong parallels in other software verticals
The trend we see in tax software is similar to that in a number of software verticals that we, at Bowmark, look at – and is a good example of opportunities in the expanding ‘regtech’ arena, where the regulatory and compliance burden intensifies and technology steps up to deliver advanced solutions.
Our investment in Tax Systems builds on Bowmark’s long track record of investing in compliance-driven software companies across a range of different verticals. These have included Datix, a software provider that supports healthcare organisations with patient safety reporting and, more recently, Pirum, which provides software solutions to the securities financing sector to address operational risk and regulatory compliance.
In many industries, companies are on a journey towards heightened digitisation and automation as they seek to improve efficiency and drive greater value out of the data they produce. Many businesses need support with this journey, presenting compelling opportunities for software firms.