Exploring Complex Business’ Tax Processes And Readiness For Making Tax Digital
Updated: Oct 17, 2022
Exploring Complex Business' Tax Processes And Readiness For Making Tax Digital
The UK government first had the vision of making the HMRC one of the most digitally advanced tax administrations globally in 2015. A major part of this plan was the Making Tax Digital (MTD) system.
This new system required all businesses to sign up for a digital tax account to submit their tax information to HMRC every quarter. And once they had signed up, they would have to use MTD-compatible software.
In 2017, HMRC conducted research in a bid to assess the readiness of businesses for the shift to Making Tax Digital. In this article, we delve into the findings of this research.
What Is Making Tax Digital For VAT?
Making Tax Digital (MTD) is an initiative of the UK government to streamline the tax process. It requires switching to a digital record-keeping and reporting system.
The primary aim of MTD is to reduce reporting errors and make tax returns simpler and more efficient. This would be achieved by reporting taxes and financial information in real-time.
Research Into Complex Business’ Readiness For MTD
HMRC aimed to explore complex businesses' awareness of MTD, and how their current tax practices affected their readiness to sign up.
Participants were identified as “complex businesses” if they were considered to be companies and/or partnerships that may have complex tax affairs and multiple transactions with HMRC.
Fieldwork for this in-depth research study was conducted from the 10th of March to the 13th of April 2017, two years ahead of the rollout of MTD.
The Research Structure & Sample
Research for this HMRC study entailed 42 face-to-face interviews with business representatives. The sample included mid-size and large businesses.
The turnover for the mid-size businesses' did not exceed £50-100m, and they employed no more than 250-500 employees.
Large businesses had turnover starting from the region of £50-100m to £500m+. They could have fewer than 500 staff but many had upwards of 500 employees.
Key Findings Of This Research Study
The company representatives noted that they were satisfied with their relationship with HMRC and had mostly positive feedback about the shift to MTD. However, they did acknowledge that some of their current business approaches to completing their tax may be insufficient.
In line with this thinking, certain issues were identified during this research study that could affect their readiness for the change. Let’s take a look at the main findings.
1. Inconsistent Levels Of Awareness Of The MTD Rollout
At the time of this research study, there was a clear discrepancy in levels of awareness of the MTD rollout amongst most businesses.
All indicated a need for more information about MTD, as they were unclear about the details of shifting to MTD and could not give a comprehensive answer to the question of their readiness for it. They were mostly optimistic about the change but lacked clarity on the details.
2. Views Of Complex Businesses
The HMRC identified the companies in the study as complex due to predetermined criteria. Complex businesses were seen as:
Companies with complicated partnerships and/or ownerships
Businesses that operated in the UK as well as abroad
Companies that followed a number of different financial record-keeping processes, as opposed to straightforward bookkeeping
3. VAT Difficulties Faced By Larger Complex Businesses
Larger, complex businesses reported that they faced more issues surrounding VAT. They gave the following reasons why:
Managing VAT for multiple companies within a group meant different return deadlines
A complicated ownership structure required additional reporting and checking
Higher volumes of transactions had to be manually entered and checked. This was cited as the biggest challenge to managing VAT processes.
4. Multiple Approaches To Tax Submissions
Participants reported using a number of different systems and types of software to manage their taxes. A few of the businesses had evolved to an entirely digital approach, although they employed various degrees of automation.
Both customised and off-the-shelf software were commonly used, as well as spreadsheets. Some of the companies reported that they were using manual processes for a fair amount of their financial and tax affairs.
The reason for the widely varied systems and software packages was that they used what worked for their particular business. Certain types of software, for example, suited specific functions better than others.
5. The Use Of External Agents
Depending on the size of the company interviewed, there were vast differences in the number of staff handling tax management and processing.
External agents were used by mid-size businesses more often than large ones. These tax agents assisted them primarily with their corporation tax and income tax self-assessments.
The majority of large businesses did not need to use external agents as they had staff in place who handled their tax affairs.
6. Corporation Tax (CT) Difficulties
The difficulty of predicting and reporting on CT was of particular concern. This was because corporation tax was considered to be a complex tax type to calculate, especially for companies that had many allowances and reliefs.
Taxable profits for corporation tax (CT) include trading profits, investments as well as the sale of assets. UK-based companies pay corporation tax on all profits, locally and abroad. However, foreign companies with a UK division pay CT only on profits from UK-based activities.
As complex businesses have a duty to report to all shareholders, it can become quite complicated. This was the primary reason given by mid-size companies for their outsourcing of CT to external tax specialists.
Although time-consuming, they were not too perturbed by having to provide information to these tax agents. Larger companies, however, tended to CT in-house but named two complex problems regarding corporation tax. These were related to iXBRL tagging and manual checking of data.
iXBRL is the standard for tagging business data for computers to process (it is used worldwide).
iXBRL tagging was, however, viewed as a burdensome aspect of the CT process. In-house iXBRL tagging sometimes incurred errors, leading to the HMRC rejecting those CT files.
Manual Checking Of Data
Businesses that were part of a larger group of companies collated and analysed data from those individual companies.
Some participants did not have software for this and relied on physically tracking the hard records. They assumed that even under MTD, they would still have to do this, as not all companies in the group would be subject to MTD and would continue to use their own systems.
7. Partnerships And ITSA Difficulties
The complex companies in the study that were part of business partnerships were required to complete Partnership Returns and Income Tax Self-Assessments (ITSA). Most of them handled this internally and were uncertain of how this would be affected by MTD.
Limited Liability partnerships indicated that their ITSA’s were very complicated due to the sheer number of their partners and their differing circumstances.
Large business partnerships often had to develop their own bespoke software for IT, as there was a lack of partnership-oriented software available.
8. Communication Issues With HMRC
Both the large and mid-size business representatives suggested that the HMRC Government Gateway could be more interactive.
Mid-size businesses, in particular, complained of having had negative experiences with the HMRC helplines. The main concerns raised were that it took too long to get through to a call centre adviser and that the advisers lacked the technical know-how to answer questions surrounding CT issues.
They also emphasised a need to share screens with HMRC call centre advisers so that any issues could easily be addressed.
9. Software Expectations
The business representatives reported that they expected one fully integrated system displaying all their tax information, with a user-friendly interface. And they suggested that it should mirror the real-time information for PAYE.
One of the main stumbling blocks to switching to MTD was the incompatibility of these businesses’ existing software with MTD. While bridging software was available, most businesses were uncertain about what they were. Therefore, they suggested that HMRC should collaborate with software providers to ensure compatibility.
10. Practical Concerns Around MTD
Some of the representatives interviewed believed that MTD would reduce their paperwork, and make managing their taxes faster and simpler.
Despite this, several concerns about MTD came to the fore. These concerns revolved mostly around the need for quarterly reporting and the meaning of “real-time”. More specifically, they were unclear about what exactly had to be submitted every quarter.
The increased costs when changing to MTD, and the incompatibility of their existing software were other top concerns raised. The main fear was that these drawbacks of MTD would impact their ability to continue with their normal business processes.
Take-Away Thoughts From The Research Findings
Regardless of the size of the business, a variety of approaches to financial and tax processes were identified. Both manual and digital processing were used, sometimes in combination. This entailed data being transferred between systems with multiple checks necessary before submission to HMRC.
While most complex businesses were managing their taxes adequately, they did see room for improvement and were mostly positive about the MTD concept. Although many companies displayed digital confidence and fluency for MTD, they did not always see a benefit to the change.
Complex businesses such as foreign-owned companies, partnerships etc have far more complicated financial and tax obligations than other companies. This affected their willingness to switch to the MTD system.
A greater understanding of MTD was needed before companies could decide how ready they were to make the change to full MTD compliance. This was not so much a case of not realising the benefits of MTD. Most of them saw the potential that MTD offered. It was more a result of confusion about its implementation.
Although this research was conducted in 2017, it has valuable lessons for us today. It is clear that for HMRC to achieve their goal of a digitally progressive tax administration, the needs of complex businesses must be addressed.
The key to a cohesive digital tax system is clarity, guidance and support. And the more complex the businesses’ processes are, the more confusion can be created by a dramatic change.
From the findings of this study, it is clear that much of this confusion could’ve been avoided with clearer communication from the HMRC.