17 February 2022
Digital tax landscape
Tax authorities around the world are embarking on ambitious tax digitalisation programs, taking steps towards automated data collection and using advanced data analytics to close the tax gap. In Mexico, for example, all VAT invoices raised by businesses are automatically sent to the tax authorities who will then allocate the corresponding VAT claim to the relevant customer. Whilst it is behind the curve to some of its global counterparts, the introduction of Making Tax Digital has been a big step forward for HMRC in transforming the way it receives taxpayer data.
The future of Making Tax Digital
Making Tax Digital for VAT was introduced on 1 April 2019 and will become applicable to all VAT registered businesses from 1 April 2022. The rules can be summarised in to three key areas:
- Business must keep certain data relevant to their VAT return in a digital format
- VAT returns must be submitted using an API (application programming interface)
- The VAT return preparation process must be digitally linked
HMRC has claimed that the current set of Making Tax Digital rules are only the first stage in preparing taxpayers for digital tax reporting. Whilst HMRC does not receive any additional information as part of the new submission, we expect the most immediate benefit for HMRC will be the availability of digital records that are easier to analyse. If HMRC follow the global trend, the future of Making Tax Digital may involve the submission of further core data such as accounts payable and receivable ledgers on a more regular basis. Making Tax Digital will also be rolled out for income tax and corporation tax, expected in 2024 and 2026 respectively.
Implications for CCO
One way we expect HMRC to use this increased level of structured data is to empower it to detect potential tax evasion. The Corporate Criminal Offence (CCO) is the failure to prevent the facilitation of tax evasion and has been in effect since September 2017. All UK taxes are within the scope of CCO including VAT and employment tax, as well as foreign taxes.
One of the areas in which HMRC has invested into more enhanced data analytics is fraud detection, for which it has deployed the Connect program. HMRC could potentially use this tool on the digital VAT records now kept by businesses during VAT audits to look for potential fraud and, as a result, take action against the business in relation to any identified tax losses across their supply chain. If the data submitted to HMRC as part of the VAT return increases as expected, this could also be used by HMRC for more automated data analysis on a regular basis.
What businesses should do
Businesses already have an exposure to CCO prosecution, and it appears it is becoming increasingly easy for HMRC to identify potential fraud within data sets. There is a defence against prosecution if businesses implement reasonable risk-based prevention procedures. Many businesses may have conducted a tax risk review at the time of CCO’s implementation, but these were largely focused on corporation tax and may not have been updated since 2017. VAT is a transactional tax and is therefore inherently at risk of potential fraud. We often find the amount of VAT processed by a business is much higher than its corporation tax liability but often with proportionately less controls surrounding its processing.
As a first step, we would recommend businesses identify how much they pay in corporation tax, VAT and employment taxes and assess the processes and procedures in place to help prevent facilitation of fraudulent behaviour for each tax. RSM’s tax specialists can assist in the risk assessment of each tax and suggest processes and controls reasonable to cover the risk of each specific tax. This includes input from our team of tax technology experts that understand the analytical powers at HMRC’s disposal and help you understand how HMRC might use the data your business has available.
Please get in touch with Sophie Bateman, or your regular RSM contact if you would like to discuss further.