If you are thinking HMRC’s plans to move over 1 million VAT-registered businesses to the new Making Tax Digital reporting platform in April 2019 is a lot of bother for reporting just nine boxes of VAT data, then you are right. It is an enormous upheaval to deliver what HMRC already receives.
But a closer look at the new reporting format being imposed by HMRC gives a big clue as to what’s coming next. Plus, a look around Europe and beyond provides for a warning on HMRC’s future plans to gain unprecedented access to companies’ accounting records.
Ending £600 million in one-way errors
At the heart of MTD’s aims is ending manual intervention to end human error – which HMRC blames for over £600 million in miscalculations. Although interestingly HMRC points out that after close investigation most of these ‘unintentional’ errors are in businesses’ favour!
The problem is only just over one in ten VAT registered businesses bother to use the current XML-based data upload function to submit their return data automatically from their accounting software. Most other tax payers login manually to HMRC’s web portal and key-in in the numbers online. Whilst Luddite-resistance is largely to blame, the need for manual adjustments first in Excel does explain some of this reluctance.
But instead of making the well-trusted XML upload mandatory for all returns, HMRC instead is introducing a whole new format. This is requiring upgrades to all commercially available accounting packages and in-house developed software. Why the trouble?
HMRC goes bionic with API
The new MTD data exchange format, Application Programming Interface (API), is the part of HMRC’s computer servers that receives the VAT return data and returns responses. It works using JSON files, where are already in computer code. The means huge amounts of data can the transmitted and returned in an instant. XML, at over 20 years old, is looking a little fax-like these days by comparison. It requires a lot of retranslation by servers, and carries a lot of memory-hungry supplementary tagging.
Yet, if HMRC is still only requiring the same nine pieces of VAT data, why impose the titanic API upgrade? The answer is simple: HMRC wants more than just the current summary VAT data.
Struggling with the £13.3 billion VAT gap
HMRC has its eyes on the continuingly stubborn VAT gap. This is the estimate of the amount of VAT due, based on levels of national trade, versus the amount actually collected. October’s latest estimate, £13.3 billion, showed an increase of £1.3 billion over the previous reporting year. The European Union by contrast has managed to cut its own VAT gap by €10 billion to €147.1billion in its latest published figures.
To break the impasse, HMRC has concluded that it needs more data from taxpayers to identify honest errors or deliberate fraud. And that is why it is forcing the investment by the million-plus businesses in API reporting. Only this will enable it to access the mass of meta-level detail from businesses that it needs to tackle the VAT gap.
Data to embarrass the finance director
How will this come? April 2019’s MTD switch from XML to API is just the warm-up. If that goes to plan, and the 1-year soft-landing phase of completing the digital journey progresses, then the data demands could be widened. It is likely that full ledger transaction reporting will be requested around 2021. Any transactions involving a VAT element will be stipulated: general ledger; sales; purchases; stock; and fixed assets. Ultimately, the API could carry the burden of delivering bank account-level transactions to provide settlement details, too.
With this data from all parties in the transaction chain, HMRC, with hugely powerful analytical software, will be equipped to independently check everyone’s version of the tax transaction. This will help highlight errors or fraudulent activities such as missing trader fraud, and mean HMRC will probably know tax payers’ businesses better than their FD or CFO.
HMRC gets a Brazilian. An Italian and a Spanish.
HMRC’s appetite will not just be satisfied with the new API’s ability to ship huge volumes of data either. It may also want to replicate the examples of Spain and Hungary, which now require live or near live reporting of sales invoices to process immediate checks and identify fast-moving frauds.
And this could go one step further to pre-approval of invoices as much trailed in Brazil and in Italy from 2019. In these countries, the tax authorities can now block suppliers’ invoices from going out the door if they do not like the look of the VAT treatment.
Within five years, HMRC will want to have all but killed off the VAT gap. With MTD, it has the Trojan Horse to achieve this. But we will all have surrender the keys to our accounting records. In real-time.