Phil Morris, tax director at PwC Isle of Man, discusses digitisation of tax.

In a dystopian future, businesses are required to send all financial and tax-related information to the tax authorities digitally and in real time.

The tax authorities know exactly what the business is doing at all times.

Sounds ridiculous?

Well, although there is a way to go, we are rapidly moving towards such a situation. Big Brother is indeed watching you.

What is driving this change? Technology? Tackling tax avoidance/evasion? Reducing tax loss through errors?

All of these.

As the world becomes more connected and the digital economy comes of age through mobile technology, cloud computing, digital transaction processing and real-time reporting, we are seeing an increasing number of tax authorities around the world adopting or reforming their tax compliance systems to take advantage of the opportunities afforded by such technological developments.

You may wonder if this is going to happen in the Isle of Man any time soon and the answer, to some degree at least, is ’yes’.

For instance, many financial institutions are already passing bulk financial and personal information electronically to the Isle of Man Government’s income tax division as part of the automatic exchange of information process.

For businesses already with a footprint in the UK or further afield, they may have to deal with these issues sooner rather than later.

The UK is pressing on with its ’Making Tax Digital’ strategy.

From April 2019, businesses with a turnover above £85k will have to meet certain VAT compliance obligations digitally.

This is more than just submitting and paying a VAT return electronically and will include keeping digital records for VAT purposes, creating a VAT return from the digital records held in functionally compatible software, and then providing HMRC with this information digitally.

This digital approach is planned to extend to other taxes, possibly from 2020.

There are a few EU countries where businesses are already providing a greater level of financial and tax-related information in real time to the tax authorities through a process known as ’SAF-T’ (Standard Audit File for Tax).

Businesses impacted by these changes should be asking themselves questions, including:

Are you ready for this?

Are you confident about the accuracy and integrity of data and information?

Are you happy about what the data is going to be used for?

Clearly this will have an impact on businesses’ tax compliance procedures.

There will be numerous issues for a business to consider, including getting the right information, testing that it is accurate, correcting errors and then ultimately reporting in the required way. With many tax penalty regimes being geared towards capability and behaviour, there will be even more focus on demonstrating effective tax processes and controls.

From a personal perspective, my work at PwC increasingly involves using a range of technology-enabled solutions to help clients with their tax compliance.

This includes tax software that can check through vast amounts of raw data, identify and correct errors and prepare clean data to be submitted to the tax authorities.

For someone used to leafing through the tax legislation and using spreadsheets, this represents a cultural shift in working procedure and it is notable that clients feel the same about changing their own practices. We expect this trend to continue apace.

Ultimately, nobody wants to be on the receiving end of a penalty for non-compliance.

Not only can it make a dent in the bank account, it can prove costly to the reputation of the business.

It is important to prevent a problem before it turns into a headache.

We’re already working with a number of businesses to help them get a handle on their tax compliance requirements and give them peace of mind.