In an era of digital transformation, it’s no surprise that the UK financial sector is changing. The Edinburgh Reforms are driving the adoption of initiatives like Making Tax Digital (MTD) to streamline processes. With tax authorities transitioning towards real-time data processing, it’s essential for advisers to understand the implications and the opportunities this offers and to guide their clients accordingly.
At the core, the Edinburgh Reforms promote innovation and competition and support the government’s mission for a competitive and technologically advanced financial services sector through policies promoting simplification, innovation, and competition. MTD complements these goals. However, financial services taxation has always been an area of complexity.
His Majesty’s Revenue and Customs (HMRC) is not alone. Other tax authorities increasingly access more data, in more detail, more often, and are sharing that data more readily across departments and jurisdictions. Over time, this may lead to the “death” of the tax return, replaced by real-time data exchanges and tax collections. Countries are moving at different speeds towards this vision, but the direction of travel is clear.
A Necessary Journey
Countries with older tax legislation typically find it more difficult to adapt as markets are digitised. Some tax authorities are enacting new data-focused tax legislation. For example, New Zealand prioritises simplicity by minimizing exceptions and deductions, which helps to accelerate the country’s ambitious digitalisation programme. Other countries, including those in Eastern Europe, Latin America, and southern Europe, have a similar approach.
The UK’s antiquated and complex tax system limits the speed with which HMRC can move, but it has recognised the need to move towards these same goals. This is especially true given the global nature of the financial services market and its importance to the UK economy.
While HMRC has invested heavily in IT for many years, it has first needed to update fundamental and disparate parts of IT infrastructure before striding towards a digital future. At the same time, financial services has become increasingly complex, global, and digitised, largely driven by technology. HMRC must continue to evolve. To stop is to risk being left outside the IT-driven ecosystem being created around them, unable to efficiently collect tax.
Impact on Business
Tax functions have an opportunity to redefine themselves in advance of the authorities. Tax is no longer just a compliance and reporting function; it needs to be close to the beating heart of the business, in turn seeing transactions and decisions as they happen and identifying and addressing issues in real time. MTD is therefore an opportunity for tax to provide increased value to the business.
Tax needs to be a master of data, not beholden to it. It needs visibility over data much sooner to provide insight before the data is shared externally, understanding that it will increasingly be shared in real time with tax authorities (e.g., e-invoicing). This is possible given today’s technologies but requires a fundamental rethinking of what the tax function is, how it works, and how it interacts with the business.
How to Get There
Each business needs to plot its own course towards this goal, which will depend on a range of internal and external factors.
To start, it’s important to identify how the function operates now and whether the tax function can leverage existing or planned change projects elsewhere in the business to access “better” data, sooner. This is the lifeblood upon which future flexibility, scalability, and transparency depends.
A realistic vision can then be built for the function, and a journey can be plotted out to achieve it. Quick wins can often be identified along the way and complement existing change projects without significant financial or resource commitment.
Often, the tax function lacks the confidence to engage with these other projects and stakeholders, but early and open two-way communication about partnering is key. No change is not an option, and the most effective change to implement and operate always comes from such joined-up initiatives.
The Road Ahead
As tax continues to change, the Edinburgh Reforms and initiatives like MTD are evidence of authorities playing “catch-up.” Tax should see these initiatives as opportunities to build resilience, flexibility, and insight over data—an opportunity to become a profit centre and proactive risk manager for the organisation.
If a client has not started evolving their tax function, financial advisers can bring significant strategic and operational value by starting the conversation. As a trusted advisor, you are in an optimal position to help them understand the impact of these changes, inform and educate stakeholders and, most importantly, help your clients develop and deliver practical plans to change.
The road ahead may seem daunting, but the pace of change will not slow. There is no real alternative to tax adapting to, and benefitting from, its new role with your ideas and assistance.
This feature appeared on FT Adviser on 3 July 2023.
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