HMRC’s digital transformation aims for real-time reporting for VAT by 2030. The core objectives of digitalising the VAT system is to streamline tax processes, reduce fraud, improve accuracy and reduce the tax gap. 

The move to real-time reporting for VAT by 2030 forms part of a wider digital transformation of a range of taxes. HMRC has already begun MTD for income tax and corporation tax. 

The first phase, Making Tax Digital (MTD) for VAT, was introduced in 2019. Some businesses, however, have had a chequered experience using the new digital system, despite more than 1.6m businesses using MTD for VAT, submitting more than 11m returns. 

On the upside, UK businesses want HMRC to achieve its real-time reporting plans, EY reports in its paper The Future of VAT in the UK. But users need a clear and fixed roadmap for the journey to real-time reporting, with enough time to prepare a business case to secure the funding needed to transform and deliver the transition. 

In the UK there has also been confusion around when and how they are expected to make the transition. 

Paul Beare, Founder and MD of accounting firm Paul Beare Limited, says: “Digitalisation hasn’t worked yet. The current simplification does not go far enough and VAT remains a very complicated area for businesses.”

He’s not the only one fed up with the lack of progress. Russell Gammon, Chief Solutions Officer at Tax Systems, says: “No further progress has been made in the digitalisation of the VAT system. This is somewhat frustrating as being compliant with MTD for VAT took a significant effort and heavy lifting from organisations, including of course HMRC itself. Now the foundations have been set for big change, but despite the programme having made some improvements, its full potential is not being realised.”

A progress report by the National Audit Office (NAO) published last year found that larger businesses were more successful in complying, but the tax office “needed more time to move taxpayer records off legacy systems due to the extent of data issues it had to deal with”.

The NAO report said that HMRC’s “initial timeframe for MTD was unrealistic”. It also found that “the repeated delays and rephasing of MTD has undermined its credibility and increased its costs”, and worried that “delivery partners and taxpayers disengage from a programme that can only succeed if those groups significantly change their behaviour”.

Initially there had been concerns that the technology wasn’t ready for the change, but since MTD for VAT’s inception, the stumbling blocks have been more around change management challenges rather than technology. 

Gammon says: “While technology has significantly improved in the past few years, MTD for VAT is at risk of stagnation. If HMRC were to refocus on VAT, more likely than not companies would be open and willing to implement more change to obtain the full potential of the digitalisation of VAT.” 

EY, however, argues that HMRC has already achieved a lot in a very complex and long-established framework.

Ben Woodfield, Indirect Tax Partner, EY, says: “Change for anyone is difficult to manage. It’s almost like technology is a little bit of a red herring when it comes to changing a process and it’s very easy to blame technology. What you have to remember is HMRC covers taxpayers from a single individual all the way up to a large multinational organisation. Therefore, trying to get the approach and guidance right for everyone is a massive challenge.”

Some of the primary complexities that have arisen around digitalising VAT revolve around the integration of digital systems with existing business processes. Paul Lodder, VP of Accounting Product Strategy at Dext, says: “The transition from paper-based systems to digital platforms requires extensive data migration and high accuracy, while training and support to ensure business owners are well-informed on digital tools is critical to successful digitalisation.” This may take an extensive amount of time and resources, he adds. 

Recently, HMRC shared findings that revealed that businesses who were less digitally confident experienced significant anxiety around changing methods of record keeping and submitting returns, underlining the importance of digital training.

Overseas efforts

Despite advances, HMRC efforts seem to have stalled somewhat compared with other countries. For example, the European Commission has proposed a modernisation of its VAT system called VAT in the Digital Age (ViDA) to help countries collect VAT revenues. These measures include real-time digital reporting, e-invoicing and single VAT registration. The transition to e-invoicing, for instance, has led to almost €11bn in fraud savings.

EY says there’s clearly still a long way to go before UK taxpayers are providing the same level of transactional data as some other jurisdictions. 

Sarah Delaney, Indirect Tax Director, EY, says: “MTD for VAT focused on automating the VAT return submission process, as well as introducing digital journey requirements to remove the manual processes many businesses operated as standard, with an aim of reducing VAT errors along the way. This is quite basic in comparison to what other countries are doing. The EU is seeing many countries introducing new e-invoicing and real-time reporting rules, but other countries, like the Latin America countries, have had significant real-time reporting requirements in place for a long time, so they’re a lot more advanced.”

While the UK used MTD for VAT as the first stage in its digitalisation journey, there is a broad spectrum of approaches across different countries, with the EU ViDA proposals an example of a digital strategy that has led to many EU countries introducing their own domestic rules ahead of the EU proposals, adds Woodfield. “In comparison, the UK’s MTD for VAT approach was more simplistic and, in a sense, could be viewed as behind the curve. However, in HMRC’s defence, the UK didn’t necessarily need to go to the same level straight away. HMRC can instead learn from other countries’ implementations.”

The lesson for everyone going through the digital tax journey, Woodfield says, is its complexity. Different country rules – and businesses’ differing footprints, systems, budgets and resources – means there is no one-size-fits-all approach to meeting digital requirements. 

“A holistic approach, which as a minimum addresses good data quality and involves tax at the table early on with relevant stakeholders, including IT and finance, is of paramount importance,” says Woodfield. “It’s a journey that the Latin America countries have been on now for a long time and it may be possible to learn some lessons from those countries’ regimes.”

Other countries such as those in the Middle East, which have introduced VAT for the first time in the past five years, have been able to leapfrog countries and bodies such as the UK and the EU where VAT has a long history by leveraging technology as part of the journey, Woodfield says.

Where to next?

Beare highlights the areas where HMRC still has work to do. He argues that agents are still very limited in their ability to manage a client’s VAT affairs in full, which leads to more red tape. He also points to the lack of advisers on hand to guide businesses through the process.

“Businesses have no option to seek the assistance of advisers. Clearer guidance and simplified rules would allow those businesses unable to afford adviser fees to be more confident in their VAT treatment of supplies. We still have very outdated and ambiguous rules,” Beare says.

Frustrations abound among the different taxpayers. For smaller organisations, they have struggled with the technological change and investment, while for bigger companies the delays have compounded their struggles to make the case for change internally.

Tax experts say HMRC has learned significant lessons over recent years about how to communicate better with different types of taxpayers and help them manage the varied challenges they face. It is taking longer than planned, but with better stakeholder consultation and a listening ear to the feedback, it is hoped HMRC is now back on track to achieve progress. Indeed, the consequences of failing to advance MTD for VAT are far-reaching for all of us.