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MTD: Far from ‘one and done’

It might seem an odd time to be publishing an article about Making Tax Digital and VAT automation. After all, most large businesses ticked this off in April - a Tax Director in a FTSE-250 was heard to say MTD for VAT was ‘one and done’.

And yet… A key finding of a recent ARKK survey was that over 65% of respondents were looking to invest in the near term in VAT software. This, on the face of it, seems counter-intuitive, as all of these organisations would have recently invested in software to become MTD compliant. It becomes more explicable, however, when we review the different software options available; and it becomes increasingly clear that MTD compliance is for many organisations not a fixed point in time but an ongoing process of improvement.

A key point to understand is that not all MTD technology solutions are created equal. They fit neatly into two distinct groups: bridging software, and automation solutions.

Bridging software simply enables a VAT return to be filed electronically. It is characterised by sitting on top of an existing process; for example, taking numbers from an Excel workbook and integrating them into HMRC’s filing systems. This category encompasses a large number of solutions provided by both software companies and by accounting firms. They are typically inexpensive and easy to deploy.

On the other hand, automation solutions such as ARKK’s for:sight platform, take a more end-to-end approach to the VAT return process, mapping data from the original system of record into a VAT specific workflow, using in-built exception reporting to analyse the data, before packaging into the return format and submitting to HMRC. These are more complex solutions, generally supplied by specialist software vendors, and often require custom integration to realise the full benefits.

In the run-up to April 2021, a majority of large businesses invested in bridging software. There may be several reasons why this was chosen ahead of automation solutions:

  • Budgets - bridging software is cheaper
  • Resource - integrating an automation solution takes longer than simply installing bridging software
  • Scale - a relatively simple business may not benefit from automation
  • Complexity - businesses may feel that their processes are uniquely complex and unsuited for automation

Aside from these business reasons, another key factor was something else increasingly familiar over the past 18 months - panic buying. Some businesses simply left the decision too late to take on anything more complex.

These purchasing decisions are not set in stone, however - and, as we move towards the first anniversary of many of these decisions, organisations are rethinking their approach. To see how this may unfold, it can be helpful to look to the past.

There is nothing new in tax. And while MTD was a step change to what has gone before, the way businesses responded to it is very similar to the reaction to mandatory iXBRL filing for Statutory Accounts back in 2011. The majority of organisations did one of three things:

  • Purchased third party iXBRL tagging solutions
  • Invested in solutions to automate accounts preparation
  • Outsourced accounts preparation and/ or tagging to a third party

It is interesting to look at how this market changed over time. Initially many businesses bought simple tagging solutions. Over time most of these have migrated to more highly automated systems (and software providers have increasingly withdrawn their low margin tagging solutions from the market).   We are now beginning to see a similar shift in VAT.

What is driving this? There is no one answer, as different organisations have different priorities. One strong hint comes from a different question in the ARKK survey. This found that nearly 1 in 3 of businesses surveyed (31%) had only moderate or no confidence in the accuracy of their submissions. This was up from 2020, and considerably ahead of the pre-MTD benchmark figures of 2019 (22%).

The complexity of many compliance processes has of course increased through this period, partly as a result of Brexit; but a significant factor has been the added visibility of VAT processes as a result of bringing in technology to enable MTD compliance. Bluntly, many organisations have shined a light on their current way of doing VAT and have found it wanting.

More widely, bridging solutions in many cases demonstrated that flaws still exist further upstream in the process. Accuracy is clearly highly important - but so is the time committed to the process and the internal resource that this swallows up. In many cases, bridging software has increased the resourcing burden; and this comes at a time when the general level of complexity of tax compliance is increasing. Businesses are now looking to automation solutions to better manage their internal resources.

As businesses look to automate VAT, and to review third party automation solutions, they are discovering an unexpected benefit of going through the MTD process. They are far more savvy buyers than a year ago. This is clear both in how they navigate their internal processes, and in how they see the market of software providers.

For many organisations, a bridging solution was the first time that they had ever invested in VAT technology. Within most businesses, it is much harder to buy something for the first time than it is to double down on an existing investment - this is a key factor in why tax teams find it much easier to procure services than software. But once an indirect tax function has been through a business case and procurement cycle it becomes much easier to go around again.

Similarly, having made that initial acquisition, a tax function can engage with the external market with far more confidence. There are fewer organisations offering automated solutions for VAT than there are offering bridging software, so the initial market filtering is more straightforward; and there is a much stronger idea of what is right for the organisation second time around.

And given the experience with iXBRL, we will over time see decisions being forced on companies as accounting firms and software providers look to withdraw their tagging solutions from the market.

The ARKK survey bears all of this out. When asked about the VAT process, 23% of respondents automate VAT already; and - compellingly - 56% are planning to do so in the next couple of years. For many businesses, moving from simple regulatory compliance to a value-add automated solution is a process that is already underway. With MTD, far from being ‘one and done’, providing a catalyst for continued improvements.

If you would like to unlock the full benefits of an automated solution to manage your VAT process, contact us to arrange a for:sight demo tailored to your business needs.