The death of the tax return? Nothing more than a provocative soundbite

W

hen someone suggests that tax returns will soon be obsolete, a reasonable initial response is which one? Because they are all different.

Looking at two of the main taxes, corporation and VAT, they work differently and are usually handled by separate teams. There is little in common and attempts to combine the two have generally been consigned to failure. People may want the simplicity of a single support function and contract but, here in the UK, most tax functions cannot be brought together in any significant way. So, when we hear talk of ‘the death of the tax return’, what it really means is ‘the death of the indirect tax return’, perhaps?

VAT is most assuredly primed for automation, with a major transition to e-invoicing expected in the coming years. We see this already happening across various jurisdictions, with some countries already having fully adopted the standard. That doesn’t mean the tax return will die, however, because e-invoicing won’t handle complex adjustments such as partial exemption, bike to work schemes, or more obscure rules like the fact that if you buy more than a certain amount of fuel in a commercial transaction you must adjust the rate applied. E-invoicing is progress, but it doesn’t mean VAT happens automatically without intervention from tax professionals.

When it comes to corporation tax (CT), the overall process has remained the same for decades, despite new Finance Acts periodically shuffling procedures. Nevertheless, in the next five years or so, two things will dramatically shake up the landscape: MTD for CT and the introduction of new technologies. MTD for CT will doubtless alter the operating model, reinforcing the need for judgments on data with a clearer focus on data quality. Usually, CT processes are clarifying data that has already been cleaned prior to being used in CT. However, with MTD for CT, quarterly submissions will occur a few days before VAT returns.

The introduction of new technologies is affecting the decision to in-source or outsource the CT return process, amongst other things. Typically, the data sits with either the company or their partner, not both. However, the rise of SaaS solutions in the tax sector makes co-sourcing a viable possibility.

Whilst the industry is likely to see more change in CT in the next five to ten years than in the previous twenty, it doesn’t mean we are going to see the death of the traditional tax return. In fact, the CT compliance cycle continues to grow, rather than diminish. Put simply, there are too many adjustments and complications to eliminate the return. Take R&D tax credits, for example, an area which boasts many dedicated software solutions to handle its values. All that work results in large adjustments in CT returns; however, the fields in which these adjustments are entered only add a minuscule fraction to the total number of fields.

The complexity involved is staggering. Corporate tax software can have over 100,000 different input cells for CT calculations; replacing it with ‘no tax return’ means HMRC must extract the data from customer systems and figure it all out by themselves, an unlikely prospect to say the least. In fact, a solo tax professional could spend up to half their annual time completing a single CT tax return, given the volume of data and complexity in adjustments. That can’t be done from the source data alone.

One more thing to consider: everyone who works with tax is familiar with the idea of ‘garbage in/garbage out’. Tax data can be poor quality and lacking detail, a massive pain point which requires much improvement. In the coming years, we’ll enjoy much better ways of dealing with tax data but that still doesn’t lead to the death of the tax return.

Ultimately, we should all welcome change, however, while it is fun to imagine our ideal progress to a world of automation with minimal human intervention, it just isn’t going to happen any time soon. We still work in an industry where tax returns depend on up to 100 per cent manual work. In fact, the manual completion of the CT return is often cited as an excellent way to train employees. That approach is doomed to history as automation becomes the norm, however, human judgment will always play a key role. Rumours of the death of the tax return have, therefore, been greatly exaggerated. It’s going to be with us for many years to come.