Filing company tax returns online: Four key issues for XBRL compliance

HMRC electronic filing deadlines are looming - are you prepared?

HMRC electronic filing deadlines are looming - are you prepared?

Deadlines for filing company tax returns online are looming. So what are the practical issues that firms must address to ensure accounts conform to electronic filing standards? Cath Everett reports.

From 31 March 2011, it will be compulsory for each of the UK's 1.6 million or so companies to file tax returns and pay corporation tax to HM Revenue & Customs electronically.

But to enable these online transactions to take place, all relevant documents will need to support a graphical form of the eXtensible Business Reporting Language (XBRL), known as Inline XBRL (iXBRL).

XBRL is based on XML and is a global standard for exchanging business information in a machine-readable format. iXBRL, on the other hand, presents data in a way that can be read by humans and in a fashion not dissimilar to existing hard-copy documents.

There are several reasons why HMRC is going down this route. First, it is keen to save money and improve accuracy by being able to enter standardised information into its systems electronically rather than manually.

Secondly, storing information in an electronic format is not only cheaper, but also means that it can be manipulated and analysed more easily.

what are the practical issues facing firms leading to the switch to electronic tax returns

The deadline looms for companies to wave goodbye to paper tax returns
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There are two key aims here. The first is to improve risk profiling and targeting when selecting those cases that may warrant further inspection for suspected underpayment of tax. The second, longer-term goal is to model more effectively the impact of possible changes to tax regimes on different categories of organisation.

1. How compliance affects individual companies
The first companies to be affected by HMRC's new mandate are those that last reported their financial year-ends in April 2010. This means they now have less than a year to prepare themselves, although they do have the option of accelerating their tax returns and filing them on paper before 31 March 2011 if they so choose, thus enabling them to defer the problem.

Such a decision could be helpful in providing more time to observe the rest of the market and see how other organisations are tackling conformance.

Jon Rowden, XBRL assurance leader at management consultancy PricewaterhouseCoopers (PwC), explains: "So organisations can defer compliance for another year or address XBRL. It's a free choice and one of the things that people are not fully aware of, but it's generally one of the first things we advise companies to think about."

As for compliance-related costs, these are likely to vary widely depending on the size and structure of each organisation. Those firms that have relatively few statutory companies and so file relatively few tax returns - even if they have thousands of staff - may find the task a relatively inexpensive one.

But those that operate a lot of companies, including dormant ones, within a group structure - even if they employ relatively few personnel - are likely to find it much more onerous.

Another factor in the mix will be the state of existing business processes. Such processes tend to be complex in large enterprises as they need to gather information from multiple locations. Consequently, revamping these processes or overlaying them with new ways of doing things can take significant amounts of time, money and effort.

As a result, for those organisations that have not yet written their budget for 2011, it would be advisable to include such considerations when doing so.

As Rowden says: "Now is the time for some measured urgency. Companies that plan now and devote time and energy to devising the right solution shouldn't be unduly anxious, but they do need to recognise that time and resources need to go into this."

2. The need for planning
Awareness of the new electronic filing mandate has increased significantly over the past few months as HMRC has started upping the ante and the issue has received more publicity.

As a result, while many companies are still at the fact-finding stage, others are now moving into the planning phase. To this end, they are gathering input from all stakeholders, who range from tax and accountancy to IT and procurement personnel, to spec solutions to the problem.

Things to bear in mind in this context include:

  • Appointing an individual to take responsibility for the project, which will include change management.
  • Understanding how many tax returns and corporate financial statements will be affected by the new rules.
  • Working out who will undertake the work involved in adding iXBRL tags to financial and tax data.
  • Identifying who will be responsible for spotting and resolving any disagreements or discrepancies relating to such tagging activity, which in some instances will require a judgement call.
  • Establishing what new processes and controls may be needed, including the testing and checking of iXBRL tags to ensure that they are accurate.

As far as implementation goes, however, Ronan Langford, director of Deloitte's information and technology risk team, warns that there is likely... be "a peak or crunch around resourcing" in March or April next year among those organisations with financial year-ends later this year.

"If they're not prepared, it's going to be, 'Whoops, we've got to get this done', so things will pick up from December and it'll be pandemonium," he says.

Another thing worth remembering is, while some FDs have chosen to delegate responsibility for the initiative to their tax compliance or senior accounting managers, they still bear ultimate responsibility if the tagging of their data - and, therefore, the reporting of their financials - is incorrect.

HMRC is expected to adopt a light-touch approach for the first couple of years after implementation to give companies time to get their tagging right. But those companies that fail to submit iXBRL financial statements will not be deemed to have lodged an acceptable tax return. As a result, existing penalties will apply.

3. Possible solutions
The iXBRL tagging of data in financial statements is essentially a matching exercise, which involves reading financial disclosures and finding the appropriate tag from a taxonomy of 5,000 or so items.

But while the task is a mechanical one, it does require the necessary skill and knowledge to get it right. There are tools to help, however.

For single entity, owner-manager companies that currently use the CT600 Short Tax Return form and do not provide more than three supplementary pages, HMRC has made templates available called Online Tax Return - CT, which are free to download from its website.

Paul Booth, technical and development manager at the Institute of Chartered Accountants in England and Wales, says: "If you've just got one company with simple requirements, you can simply download the HMRC free product and use it to submit your returns, but you don't need to do anything more. At the top end, it can be a big, expensive project, but at the bottom end, it could be just a small and simple thing that takes an hour."

For more complex organisations, however, there is a range of possible other options:

  • Manual and predictive software tagging tools for accounts prepared using Microsoft Office software from vendors such as Arkk Solutions and CoreFiling. They enable users to either select the relevant iXBRL tag and attach them to pieces of information in financial statements or have the process undertaken automatically.
  • Upgrades to existing commercial tax, accounts preparation and financial reporting production software from suppliers such as Sage and CCH Software, which are expected to start appearing by autumn this year.
  • Managed service providers such as DataTracks and KPMG, which will tag completed financial statements.
  • Chartered accountancy practices, which are expected to upgrade existing services.
  • Business process outsourcing and offshore providers such as Wipro and Infosys, which undertake full year-end account preparation but are likely to be mostly employed by large corporations due to the expense.

Each offering will suit the requirements of different types of organisations but adoption trends are unclear because of patchy uptake.

But PwC's Rowden says: "I think there'll be a trade-off. Some solutions such as outsourcing will be about how much cash is available, while others will be about how much time and training it would take internally for people to be competent with any solution. So it'll be about striking the right balance."

4. A potential catalyst for change
Deloitte's Langford expects the introduction of electronic filing and iXBRL support to act as a catalyst for change over the next couple of years.

Although in the short term, organisations will focus on simply jumping through the necessary compliance hoops, into the longer term they are likely to engage in larger data management projects in an attempt to clean up information and streamline existing, often unwieldy business processes.

The challenge for many companies today is that they spend significant amounts of time and effort in consolidating data from multiple versions of their accounting systems. They then undertake management reporting and data analysis using various business intelligence tools, which can end up providing different views of sometimes disparate information.

But Langford says: "The requirement for more and better quality data is increasing not just internally, but also from the legislative and investment community. So you've got to figure out a way of providing that without increasing costs and the only way you can really do it is through automation and improving the quality of your data and business processes."

Although such projects can cost hundreds of thousands of pounds, typical business cases include improved consolidation models, shortening reporting cycles and satisfying a wider group of stakeholders than simply HMRC.