As we find ourselves at the advent of the fourth industrial revolution, digital disruption is all around us. Buzz words like “Blockchain”, the “Internet of Things” and “Artificial Intelligence” that were previously in the vocabulary of only the most revolutionary technology enterprises have now found their way into the corporate boardroom.

This is a reflection of the new digital world in which we now live and work, one where the largest taxi company doesn’t own a single vehicle and the largest accommodation provider holds no real estate. For an increasing number of companies, success is no longer linked to their tangible assets but instead is entirely attributable to the effectiveness of digital platforms. Digital power and technological solutions have blurred the lines of established business models beyond recognition to the point where technology and business have become inextricably linked.

While many Northern Ireland businesses may feel that the digital invasion is only the concern of large, global or tech-orientated businesses, the UK Government is forcing the issue on almost all businesses in only a matter of months.

In this article, we will outline some of the most digitally disruptive changes coming down the tracks which will have a significant impact on how tax professionals in the future will operate. Whilst these changes are disruptive, they will allow the tax function to move itself away from laborious, manual tasks towards value-added work.

Making Tax Digital

April 2019 will see the Government roll out the first stage of its “Making Tax Digital” (MTD) initiative – a key part of its ambitious digital transformation programme. From this date, all businesses with turnover exceeding the current VAT threshold of £85,000 must ensure their software systems can keep and preserve digital records and use this data to submit VAT returns directly to HMRC.

As previously trailed in this publication, the requirements of this change are pervasive and represent the most fundamental change in tax administration in the UK in the past 20 years.

In the short term, these requirements should be addressed immediately by all businesses affected. Software and systems reviews should be carried out to ensure that they are MTD compliant.

While this will bring about a short term action list for businesses, it is important to consider the long term implications of this change and what it signals about HMRC’s views on the future of tax administration.

The digitisation of tax

The implementation of MTD is much more than simply submitting tax returns online, but rather it marks a fundamental shift in the way HMRC intends to interact with all UK taxpayers.

Through MTD, HMRC’s ultimate objective is to become one of the most digitally advanced tax administrations in the world, modernising the tax system to make it more effective, more efficient and easier for customers to comply with. To deliver on this, it aims to move to a single tax account, providing real-time information for all taxpayers.

Any tax professional will appreciate that this design is worlds away from the current approach of filing various returns, certain ones of which may be several years in arrears. Consequently, this change feels radical and highly ambitious as it cuts to the very core of established UK tax compliance practices. That said, HMRC is not holding back and have clearly indicated this through their choice of implementation threshold.

Rather than targeting only the largest organisations, as it does for other reporting requirements such as the Senior Accounting Officer legislation, HMRC has purposefully cast a wide net by aligning the MTD threshold with the current VAT registration threshold. This is a clear signal that HMRC views digital as being essential for all businesses and intends to leave no one behind in their digital transformation.

The UK is not alone in its commitment to digital transformation of taxes and the ongoing BEPS project has also shone a spotlight on the challenges of taxing the digital economy. New proposals to tackle this are expected in March of next year. While the immediate and direct implications of the current proposals are aimed at only very large and multi-jurisdictional businesses, it has highlighted that this is at the forefront of the tax-agenda globally.

Building on this global mind-set, it is not just the UK that is taking action in this area. At present many other jurisdictions including Mexico, Brazil and Australia are in various stages of digitising their tax compliance functions as a whole.

Therefore, as governments across the world embrace technology and digitisation, the digital future moves from an abstract option and manifests into a real and present concern for business to ensure that they can keep up with tax authorities. Consequently, the mind-set of businesses of all sizes and sectors must shift from: “maybe” and “what if ?” to: “when” and “what next”.

To encourage this change, businesses should be aware of, and open to, considering digital solutions and alternatives. In addition, while this transformation may be driven and managed by IT or technology departments, the tax function and its professionals must also be a key part of this digital journey.

Emerging technologies for non-experts

Whilst the tax function needs to learn to walk before it can run when it comes to applying technology but this can start with gaining an awareness of what is driving digital disruption. While many non-experts view “digital” as a fog of intangible buzzwords, at the centre of digital transformation are a handful of emerging technologies that can be clearly defined. These are disruptive digital processes and concepts that have gained momentum in the last few years and are being harnessed by businesses to change the future of work.

The technology dominating this buzz is undoubtedly Blockchain, however, in terms of relevance to the tax function, Robotic Process Automation (RPA) is the leading technology.

RPA uses machines to carry out repetitive rules-based tasks such as data entry, data consolidation and the population of forms, returns and working papers. Fundamentally, if you can make a procedural flowchart of a process, you can create the RPA without the need for coding knowledge. The ‘robot’ simply follows the decisions made in the flow chart.

Given its emphasis on rules and the repetition of these processes, tax is a comfortable match for RPA. While this is certainly a disruptive technology, disruption does not always have to have a negative connotation and can be used to unlock new value and efficiencies.

The effective implementation of RPA can deliver greater accuracy in output and reduce processing time to a matter of seconds in some cases, however it requires electronic and well-documented data in order to achieve this. RPA can also be easily integrated with current IT infrastructure to minimise this disruption.

In addition, RPA offers the ability to work 24/7 which of course calls into question the security of jobs currently being carried out by staff. With EY forecasting that 30–40% of current business processes will be impacted by RPA due to these benefits, this provides a significant opportunity for tax professionals to move away from low value preparatory tasks in the future, and instead provide more time for review, analysis and other value-add activities.

Given the pressures placed on the current workforce in terms of attracting and retaining talent, which could be heightened as we move towards Brexit, this could provide a welcome solution to employers and employees alike.

The next step beyond the rules-based RPA is Artificial Intelligence (AI), where computers use the data available to them in order to “teach” themselves to learn, understand, reason, plan and act. Leveraging this AI, EY has developed various tools aimed at enhancing tax relief through improved accuracy and significant time savings. The most mature of these platforms is the Capital Allowances Automated Review Tool (CAART).

CAART uses smart technology and machine learning to apply relevant legislation, case law, previous analysis and new business logic to an inputted dataset. This allows it to process huge volumes of data in seconds to find the most appropriate reliefs. It is equipped not only to perform accurate and consistent tax analysis, but also to learn from past experience.

This ability to learn is the key feature that distinguishes AI from RPA, which focuses only on defined binary rules, and it is that which allows it to improve its accuracy and quality of output.

While these emerging technologies are particularly relevant to the tax function, we should be agile and aware of other key disruptive technologies that may be combined with these:

1. Block chain

What is it? A way of recording data across a number of computers at once, eliminating the need for a central authority (e.g. bank) to verify the transaction. Bitcoin, is blockchain’s biggest application.

How does it work? When a transaction happens it is grouped within others in a ‘block’. This block is broadcast to everyone in the network. The network confirms the transaction is valid and the block is then added to the chain. The chain provides a permanent and transparent record of transactions.

What can it be used for? Reducing counterfeit goods by tracking them through supply chain e.g. wine, and introducing new ways to pay e.g. cryptocurrency (Bitcoin)

What is the business opportunity? Increase speed of transactions, reduction in transaction costs, land title registration, smart contracts, and digital rights management

2. The Internet of Things

What is it? Connecting physical objectives to the internet to send and receive information

How does it work? Electronics, sensors and internet connectivity are embedded within physical objects to collect and store data. This allows them to talk to each other and act on instructions

What can it be used for? Controlling objects and systems like home heating and inventory management

What is the business potential? Automated ordering, in-transit visibility, controlling objects without being physically present, capturing big data.

3. Natural Language Processing

What is it? The ability of a machine to understand and generate human speech e.g. chat bots.

How does it work? Firstly, the computer takes the human language and converts it to machine language. This is then followed by the machine understanding what each word is and comparing it to its programmed vocabulary and grammar rules. It then searches for an appropriate response and speaks or types back.

What can it be used for? Answering questions, creating summaries of information, spam filters.

What is the business potential? Automating report production, customer services, allowing aural interaction.

While tax professionals do not need to be the authority on these technologies, just as the fluent use of PowerPoint, Excel and the internet have infiltrated our day-to-day role, a new digital vocabulary must too become part of our skill-set if we are to evolve with the requirements placed on the tax function.

Next Steps

Although MTD is a fundamental and pervasive change to the UK’s tax regime for a wide net of taxpayers, it represents only the first step in the Government’s digital transformation programme. Although the implementation date was initially pushed back to April 2019, this programme now shows no signs of slowing even in the face of Brexit. While VAT is first, other UK taxes are sure to follow by April 2020 at the earliest.

This underlines HMRC’s commitment to the project which is shared by tax authorities across the globe. HMRC is aiming to not just take the lead on these tax authorities but on tax payers of all sizes and across all sectors as well. In order to ensure that this gap does not widen to the point where HMRC has greater transparency of a business than its operators, all businesses must get on board this wave of digital transformation.

Digital transformation stretches well beyond ensuring your business is MTD compliant. It requires an understanding and appreciation of emerging technologies without an expert’s focus. While this may be a daunting task for the tax professional of today, just as we have retired typewriters, fax machines and dial-up internet to the annals of office-history, so too should we take manageable steps towards the digital future as it is quickly becoming the digital present.

Ian Edwards is a Tax Partner within the Business Tax Advisory team in EY’s Belfast office.