Over the last quarter century, technology has transformed tax administration. Much, if not most, of what has been written on the subject has been in terms of how businesses and practitioners react to the demands of tax authorities for greater digitalisation of personal and business tax returns. Far less has been written about how technology is being employed to make tax processes more efficient, or about the potential impact of technology on the advisory space.
With a view to addressing that lacuna, I have been exploring how businesses and tax professionals use technology to improve the way they deal with tax compliance and planning and at developments we might expect to see over the next few years. From a series of conversations with leading tax technology specialists in practice, industry and the software industry, a picture has emerged of how key technologies are being used to automate processes and to deliver better, more proactive advice.
We have seen significant advances over recent years. The introduction of income tax self-assessment and the launch of the electronic lodgement system in 1997 triggered a step-change in adoption of tax software, particularly by smaller practices. In 2006, the Carter Review began the wholesale move to digital for business tax returns. Other quantum shifts include iXBRL for corporation tax in 2011, RTI in 2013 and, most recently, the launch of MTD. Over the same period, something more evolutionary was happening in parallel: digital technology steadily, relentlessly acquired greater data storage capacity, processing speed and functionality, creating a self-fuelling cycle of opportunity and demand. Technology has taken over many previously labour-intensive tasks, enabling individuals to up-skill. Today, the pace of change is greater than ever and the challenge this presents was eloquently summed up by Ian Hayes, chair of the CFE Tax Technology Committee when he told me that ‘technology is moving faster than most people’s ability to absorb change’.
Technology has expanded the tax lexicon to include terms that were once the preserve of IT professionals, terms such as artificial intelligence, robotic process automation (RPA) and data analytics. These technologies are now key tools (whether bespoke or packaged into off-the-shelf software) in tax compliance and finance functions, from nano-businesses to multinational enterprises.
We live in a world awash with data and the world of tax is no different. Effective compliance, reliable insight and informed advice all depend on the availability and accessibility of accurate data. Digital technology provides the only realistic way of rendering large volumes of data into a useable form in a practical timeframe.
Firstly, data must be captured. While some will originate digitally, data from physical documents can be captured by optical character recognition (OCR) and converted into a format suitable for machine processing. OCR technology is being used by businesses of all sizes: with small businesses, this might be via a smartphone app while in larger businesses it is more likely to be via high-volume document scanners. Once captured, data can be transferred by RPA and then categorised using artificial intelligence/machine learning (AI/ML).
RPA is ideally suited to automating repetitive, rules-based processes, such as completing forms and returns, or extracting information from accounting systems and transferring it to tax software. As tax compliance involves many such processes, it is unsurprising to find that RPA is becoming an increasingly familiar tool in the tax technology toolbox.
AI can be used to identify patterns, to analyse and categorise complex documents and to identify anomalies and outliers in data sets. It is being employed to wholly or partly automate a variety of tax functions including transfer pricing benchmarking, analysis of legal documents for tax sensitive information and identification of expenditure likely to qualify for capital allowances or R&D reliefs. It is also intruding on the advisory space, powering chatbots able to answer tax questions.
Ask tax practitioners just how far AI will change advisory work and you will prompt a range of reactions. This subject was explored in depth by Richard and Daniel Susskind in their book The future of the professions: how technology will transform the work of human experts. In my own research, I found a broad consensus that AI will supplement – but not replace – the tax advisory role: there will still be a place for human judgment and experience. Views differ, however, on the likely extent to which AI will impact and on how quickly it will happen. But as Steve Cox, head of accountancy at Iris observed, ‘AI is already in our personal lives and it is already in our business lives’, adding that most people don’t actually realise they are using it when they use predictive text or engage with a chatbot.
Capturing, manipulating and categorising data is only part of the story; insight and interpretation is another. Data analytics and data visualisation (through tools such as Power BI) can provide real-time information and insight from both finance and tax perspectives, supplementing the traditional month-end/year-end model to add greater value for the business. Real-time insight can be transformative right across the business size spectrum: An adviser to a nano-business using cloud-based software can offer proactive advice based on live data in real-time, something that was simply not possible with manual systems. Some regard the availability of real time information and insight as having greater practical value than periodic accounting.
Tax authorities are of course equally keen to move closer to real-time recording of transactions to reduce error and to improve accuracy, as is made clear in the recent OECD report Tax administration 3.0: the digital transformation of tax administration. Real time reporting is at the heart of RTI and moving towards real time record keeping is one of the core objectives of MTD.
Technology has driven – and continues to drive – a trend in which finance and tax functions move closer together. It has been routine for tax departments to have to extract the information they need from systems designed primarily for financial reporting. In large organisations, this can require significant amounts of resource and (potentially) programming skills. Structuring data in a way that recognises the importance of tax from the outset is far more efficient than a silo approach and common data models will be key enablers of a more holistic process. Integration is already a common feature in off-the-shelf software and apps designed for smaller businesses.
While business needs and the demands of tax authorities (for example, MTD) have been key drivers of change, the covid-19 pandemic has been another. In very short order, businesses and advisers had to adjust to operating in a virtual world. The value of cloud-based systems, facilitating collaboration and sharing of data between remote users, became clear. Chris Downing, director for accountants and bookkeepers at Sage told me that through the pandemic he has seen ‘more willingness to adopt new technologies, and embrace technology that has now been in use for some time, such as bank feeds’.
HMRC has set out its ambitions for increasing the use of technology to improve compliance in two recent publications: Building a trusted, modern tax administration system (July 2020) and The tax administration framework: supporting a 21st century tax system (March 2021). Covid-19 has clearly impacted HMRC’s thinking and quickened the pace of change. It now envisages a role for MTD quarterly reporting data to enable more accurate targeting of government support in the future, a use for this data that almost certainly had not been envisaged when MTD was first proposed. HMRC also demonstrated considerable agility in the development and successful delivery of the CJRS functionality last year.
It will be interesting to see whether the pace of change and the willingness to embrace new technology that we have witnessed over the past year will be maintained post-pandemic.
Can technology play a positive role in simplification? I firmly believe that it can, a view that former Treasury minister David Gauke – now head of public policy at Macfarlanes – shares, averring when he spoke to me recently that ‘technology can help navigate complexity and simplify the tax experience rather than the legislation itself’.
The new tax return late filing penalty regime seems to me a prime candidate: it brings a fairer and more proportionate approach, but one that occupies 16 pages of FA 2021 and which would be completely mystifying to most taxpayers. If MTD could be used to route clear, timely digital warnings to taxpayers when points were accumulated, it would help them avoid penalties while hiding the relative complexity of the rules.
Technology will continue to drive change in tax: greater volumes of data, greater demands for real-time insight and greater processing power and functionality will guarantee that. And while we are still learning how to maximise the potential of the technologies I have already mentioned, others – such as open banking and blockchain – have to be considered too. Common data models will help to facilitate data integration across finance and tax functions, increasing efficiency and adding impetus to the trend for closer working between departments. As one MNC tax technologist told me, ‘we haven’t seen the true power of technology and data analytics yet’.
There will be a need for tax professionals to develop new skill sets centred on technology, including familiarity with data analytics and the use of data visualisation tools. There will be demand both for tax specialists with technology skills and for technology professionals who understand the landscape of tax. In the future, we will need to train people who are comfortable working across both disciplines, with strong data literacy, data management skills and an understanding of data governance. The exact skills mix being sought will vary according to the size and type of firm and whether the role is in practice or industry
Tax recruitment specialist Georgiana Head told me that ‘demand for tax technologists has not been huge – as yet. Smaller firms are looking for people who are more tech-savvy and who have good IT skills, while larger firms are seeking people with experience of process improvement and of integrating finance and tax systems’. The requirements will not be purely technical: new technologies bring with them new ethical and data security issues, and the skills needed to address these challenges will be important attributes for tax professionals in future. However dramatic, extensive and rapid the changes in technology are though, I firmly believe that the human factor will remain an essential part of the foundations of the tax profession: the exercise of judgement and an understanding of ethics are things that cannot not easily be automated. Another human – and professional – characteristic is the ability to face and navigate change, something technology will continue to generate.
We will need to harness the power of AI in the tax advisory space, while also recognising its limitations. We will need to adapt to the challenges, risks and opportunities that blockchain, cryptocurrencies and open banking bring. And we will need to do it all within increasingly complex regulatory frameworks.
For more on the impact of technology on tax professionals, see the author’s report ‘The tax technology horizon’ (published by Tolley) available via bit.ly/3xP9X7P.
Over the last quarter century, technology has transformed tax administration. Much, if not most, of what has been written on the subject has been in terms of how businesses and practitioners react to the demands of tax authorities for greater digitalisation of personal and business tax returns. Far less has been written about how technology is being employed to make tax processes more efficient, or about the potential impact of technology on the advisory space.
With a view to addressing that lacuna, I have been exploring how businesses and tax professionals use technology to improve the way they deal with tax compliance and planning and at developments we might expect to see over the next few years. From a series of conversations with leading tax technology specialists in practice, industry and the software industry, a picture has emerged of how key technologies are being used to automate processes and to deliver better, more proactive advice.
We have seen significant advances over recent years. The introduction of income tax self-assessment and the launch of the electronic lodgement system in 1997 triggered a step-change in adoption of tax software, particularly by smaller practices. In 2006, the Carter Review began the wholesale move to digital for business tax returns. Other quantum shifts include iXBRL for corporation tax in 2011, RTI in 2013 and, most recently, the launch of MTD. Over the same period, something more evolutionary was happening in parallel: digital technology steadily, relentlessly acquired greater data storage capacity, processing speed and functionality, creating a self-fuelling cycle of opportunity and demand. Technology has taken over many previously labour-intensive tasks, enabling individuals to up-skill. Today, the pace of change is greater than ever and the challenge this presents was eloquently summed up by Ian Hayes, chair of the CFE Tax Technology Committee when he told me that ‘technology is moving faster than most people’s ability to absorb change’.
Technology has expanded the tax lexicon to include terms that were once the preserve of IT professionals, terms such as artificial intelligence, robotic process automation (RPA) and data analytics. These technologies are now key tools (whether bespoke or packaged into off-the-shelf software) in tax compliance and finance functions, from nano-businesses to multinational enterprises.
We live in a world awash with data and the world of tax is no different. Effective compliance, reliable insight and informed advice all depend on the availability and accessibility of accurate data. Digital technology provides the only realistic way of rendering large volumes of data into a useable form in a practical timeframe.
Firstly, data must be captured. While some will originate digitally, data from physical documents can be captured by optical character recognition (OCR) and converted into a format suitable for machine processing. OCR technology is being used by businesses of all sizes: with small businesses, this might be via a smartphone app while in larger businesses it is more likely to be via high-volume document scanners. Once captured, data can be transferred by RPA and then categorised using artificial intelligence/machine learning (AI/ML).
RPA is ideally suited to automating repetitive, rules-based processes, such as completing forms and returns, or extracting information from accounting systems and transferring it to tax software. As tax compliance involves many such processes, it is unsurprising to find that RPA is becoming an increasingly familiar tool in the tax technology toolbox.
AI can be used to identify patterns, to analyse and categorise complex documents and to identify anomalies and outliers in data sets. It is being employed to wholly or partly automate a variety of tax functions including transfer pricing benchmarking, analysis of legal documents for tax sensitive information and identification of expenditure likely to qualify for capital allowances or R&D reliefs. It is also intruding on the advisory space, powering chatbots able to answer tax questions.
Ask tax practitioners just how far AI will change advisory work and you will prompt a range of reactions. This subject was explored in depth by Richard and Daniel Susskind in their book The future of the professions: how technology will transform the work of human experts. In my own research, I found a broad consensus that AI will supplement – but not replace – the tax advisory role: there will still be a place for human judgment and experience. Views differ, however, on the likely extent to which AI will impact and on how quickly it will happen. But as Steve Cox, head of accountancy at Iris observed, ‘AI is already in our personal lives and it is already in our business lives’, adding that most people don’t actually realise they are using it when they use predictive text or engage with a chatbot.
Capturing, manipulating and categorising data is only part of the story; insight and interpretation is another. Data analytics and data visualisation (through tools such as Power BI) can provide real-time information and insight from both finance and tax perspectives, supplementing the traditional month-end/year-end model to add greater value for the business. Real-time insight can be transformative right across the business size spectrum: An adviser to a nano-business using cloud-based software can offer proactive advice based on live data in real-time, something that was simply not possible with manual systems. Some regard the availability of real time information and insight as having greater practical value than periodic accounting.
Tax authorities are of course equally keen to move closer to real-time recording of transactions to reduce error and to improve accuracy, as is made clear in the recent OECD report Tax administration 3.0: the digital transformation of tax administration. Real time reporting is at the heart of RTI and moving towards real time record keeping is one of the core objectives of MTD.
Technology has driven – and continues to drive – a trend in which finance and tax functions move closer together. It has been routine for tax departments to have to extract the information they need from systems designed primarily for financial reporting. In large organisations, this can require significant amounts of resource and (potentially) programming skills. Structuring data in a way that recognises the importance of tax from the outset is far more efficient than a silo approach and common data models will be key enablers of a more holistic process. Integration is already a common feature in off-the-shelf software and apps designed for smaller businesses.
While business needs and the demands of tax authorities (for example, MTD) have been key drivers of change, the covid-19 pandemic has been another. In very short order, businesses and advisers had to adjust to operating in a virtual world. The value of cloud-based systems, facilitating collaboration and sharing of data between remote users, became clear. Chris Downing, director for accountants and bookkeepers at Sage told me that through the pandemic he has seen ‘more willingness to adopt new technologies, and embrace technology that has now been in use for some time, such as bank feeds’.
HMRC has set out its ambitions for increasing the use of technology to improve compliance in two recent publications: Building a trusted, modern tax administration system (July 2020) and The tax administration framework: supporting a 21st century tax system (March 2021). Covid-19 has clearly impacted HMRC’s thinking and quickened the pace of change. It now envisages a role for MTD quarterly reporting data to enable more accurate targeting of government support in the future, a use for this data that almost certainly had not been envisaged when MTD was first proposed. HMRC also demonstrated considerable agility in the development and successful delivery of the CJRS functionality last year.
It will be interesting to see whether the pace of change and the willingness to embrace new technology that we have witnessed over the past year will be maintained post-pandemic.
Can technology play a positive role in simplification? I firmly believe that it can, a view that former Treasury minister David Gauke – now head of public policy at Macfarlanes – shares, averring when he spoke to me recently that ‘technology can help navigate complexity and simplify the tax experience rather than the legislation itself’.
The new tax return late filing penalty regime seems to me a prime candidate: it brings a fairer and more proportionate approach, but one that occupies 16 pages of FA 2021 and which would be completely mystifying to most taxpayers. If MTD could be used to route clear, timely digital warnings to taxpayers when points were accumulated, it would help them avoid penalties while hiding the relative complexity of the rules.
Technology will continue to drive change in tax: greater volumes of data, greater demands for real-time insight and greater processing power and functionality will guarantee that. And while we are still learning how to maximise the potential of the technologies I have already mentioned, others – such as open banking and blockchain – have to be considered too. Common data models will help to facilitate data integration across finance and tax functions, increasing efficiency and adding impetus to the trend for closer working between departments. As one MNC tax technologist told me, ‘we haven’t seen the true power of technology and data analytics yet’.
There will be a need for tax professionals to develop new skill sets centred on technology, including familiarity with data analytics and the use of data visualisation tools. There will be demand both for tax specialists with technology skills and for technology professionals who understand the landscape of tax. In the future, we will need to train people who are comfortable working across both disciplines, with strong data literacy, data management skills and an understanding of data governance. The exact skills mix being sought will vary according to the size and type of firm and whether the role is in practice or industry
Tax recruitment specialist Georgiana Head told me that ‘demand for tax technologists has not been huge – as yet. Smaller firms are looking for people who are more tech-savvy and who have good IT skills, while larger firms are seeking people with experience of process improvement and of integrating finance and tax systems’. The requirements will not be purely technical: new technologies bring with them new ethical and data security issues, and the skills needed to address these challenges will be important attributes for tax professionals in future. However dramatic, extensive and rapid the changes in technology are though, I firmly believe that the human factor will remain an essential part of the foundations of the tax profession: the exercise of judgement and an understanding of ethics are things that cannot not easily be automated. Another human – and professional – characteristic is the ability to face and navigate change, something technology will continue to generate.
We will need to harness the power of AI in the tax advisory space, while also recognising its limitations. We will need to adapt to the challenges, risks and opportunities that blockchain, cryptocurrencies and open banking bring. And we will need to do it all within increasingly complex regulatory frameworks.
For more on the impact of technology on tax professionals, see the author’s report ‘The tax technology horizon’ (published by Tolley) available via bit.ly/3xP9X7P.
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