The quality of processes being used to manage tax reporting in many large firms does not match the quality of other finance work, says experts at KPMG. But what are the benefits in updating a tax reporting system?
In today’s increasingly regulated environment, we are seeing ever growing pressure on firms to report the ‘right’ financial numbers. Audit teams are becoming ever more demanding about signing off accounts. They continually require improvements to control environments combined with a higher level of granularity when digging into the detail around financial reporting information.
Group tax reporting is no exception to this.
The use of manual Excel spreadsheets is now being deemed insufficient where tax reporting requirements are becoming ever more complex. The quality of the process used to manage tax reporting in many large organisations does not mirror the quality of processes they may have in other areas of the tax and finance function.
Where are we in the UK?
In the UK, we estimate that around 20% of the FTSE 100 use a dedicated third-party solution to deal with tax accounting. The market for these tools has been relatively limited in the past, containing only enterprise type or in-house built solutions. We have therefore generally only seen some of the larger FTSE groups begin to use these platforms.
The majority of organisations in the FTSE 100, and an even bigger proportion of the FTSE 250, calculate their tax disclosures in Excel spreadsheets, with varying degrees of automation from group general ledger or consolidation systems. Some of the files that we have seen verge on the “unauditable”, with manual copying and pasting of figures multiple times into multiple tabs, with the overall process only possible due to the retained knowledge of the tax team.
Accounting and Tax Technology team, KPMG
Some of the files we have seen verge on the "unauditable"
This raises concerns over the validity of the figures produced, concerns around process continuity, and obviously impacts the ability of a third-party to audit them.
Until fairly recently it has been the case that, in general, tax accounting has maintained a relatively low profile within corporate groups. Boards are more interested in the cash cost of tax, rather than the tax numbers being reported in the accounts for the shareholders. In-house tax teams are tasked with managing the Effective Tax Rate (ETR) of the group, as well as ensuring that compliance deadlines are met. Many teams have experienced headcount reduction, which means that they have had to focus only on the mandatory requirements and any ‘quick wins’ available to them.
The updating of a tax reporting process has been deemed a “nice to have”, but often of secondary importance to the daily fire-fighting that takes up a good deal of many tax professional’s day-jobs.
Of late, however, tax accounting has increasingly appeared on the agendas of board meetings, which does not come entirely as a surprise. Not only does proper tax accounting provide a means to better management of the ETR of a group (which certainly is of interest to the CFO and others), but it also allows a group to better understand their various tax issues across all jurisdictions.
We have found that with some UK-based teams, there is often little knowledge of the precise tax implications of foreign business operations and as such the tax reporting process can take the form of “We know the tax implications of the UK business so we will do the tax reporting for that; for most other jurisdictions we only concern ourselves with profit before tax, perhaps a few standard deferred tax items, and finally the tax charge itself”.
This does not mean to say that tax reporting does not take up a good deal of time and resource for corporate groups. Even a simple process within Excel can take significant time and effort relative to its complexity, given the need to receive data from a great number of sources; be they overseas teams or the different financial systems being used worldwide by the various foreign entities.
The task can often be frustrating, with the bulk of the time being spent on data gathering, reformatting, manipulation and consolidation, i.e. ‘getting the numbers together’, rather than value-added activities such as tax forecasting or planning.
Manual re-keying of data seems commonplace, and several versions of each spreadsheet are often needed to track late adjustments throughout the year-end process.
Why update tax reporting systems?
The reasons for updating systems and processes are numerous; be they based on time and cost savings, ETR management, the need to increase auditor confidence, or the long term benefit of better forecasting and tax planning. In the 1990s, only a handful of the FTSE 250 had dedicated tax compliance software (most used Excel or Lotus 1-2-3). It is now the case that the vast majority of this group use software to carry out their corporate tax calculations.
The benefits are plain to see for groups, and the associated licence fees are modest in comparison to the relative size of the problem that they solve. We believe that this will happen in the tax reporting arena too, with the majority of larger groups in the UK having some form of dedicated solution in place within the next five years.
A recent real life example highlighted the benefits of dedicated tax reporting software to create disclosures. Prior to the implementation of software, the group only ever recognised deferred tax assets (DTAs) on losses in the UK in isolated examples where the UK-based central team managed the process and had a high level of understanding of the nature of the losses.
Accounting and Tax Technology team, KPMG
The reasons for updating systems and processes are numerous
With the use of software, they gained enough visibility over the type of losses, through both the higher quality of information and the time gained due to automation.
This resulted in justifiably recognising DTAs in three additional jurisdictions resulting in a lower ETR and bolstering the balance sheet for the group. Other groups have managed to cut considerable time and effort out of their year-end reporting cycle, hence realising a cost saving in terms of the man-hours that are needed to complete the tax reporting process.
We have also seen reductions in tax audit fees due to the reduced work required as dedicated software is seen as a key control.
What does the market for dedicated group tax reporting solutions look like?
Previously, the UK market for these tools was seemingly narrow in scope. Historically, there have been two main software solutions in the market equipped to deal with tax reporting specifically. The main problems that the majority of groups have with these solutions are the associated costs and implementation timetables.
Both tools require significant customisation before they can ‘go live’, with project implementation times often ranging from 4-8 months. As well as this, they require extensive training combined with ‘hand-holding’ throughout at least the first year-end using the software, and often beyond that. The cost involved in this ongoing reliance on professional advisers, as well as the often high annual licence fees, render these types of solutions not applicable for the majority of FTSE groups.
More recently, we have seen a market emerging for simpler, more ‘out of the box’ solutions. Whilst the capabilities of the historic third-party solutions are extensive, for many groups they would be a ‘sledgehammer to crack a nut’, so to speak. We feel that a more pragmatic approach will suit most groups who do not wish to overcomplicate the problem, and understand that whilst there might be specifics that relate to their particular situation, the core process involved in completing group tax reporting is the same for most groups.
On the simplest level, the process should be a question of getting numbers from source systems, adjusting them and then feeding those tax-adjusted items back into the finance systems in the form of journals. Tax disclosure reports might require specific line items that other groups would not use, but broadly speaking the main requirements are the same for the majority of the larger corporates in the UK.
This approach has the benefit of greatly reduced costs, a more efficient process, better quality information, less reliance on advisers or third-party software tools and increased implementation speeds. We see no reason why a large group should not be able to roll-out a viable solution within a two month timeframe.
Whilst tax reporting is not a ‘one size fits all’ exercise, there are enough common factors across groups that mean a common tax reporting software tool is a suitable middle-ground between manual Excel spreadsheets and the most complex of bespoke tax reporting solutions.
Ultimately we are finding that tax departments want to be seen as low risk in the eyes of HMRC. Having a high quality tax reporting process in place will help build this profile. A dedicated tax reporting solution will help group tax departments achieve this.
Whether this is a full enterprise solution or a more ‘cut down’, cost-effective solution will depend on the appetite of the tax and finance functions in these large groups.
Written by Russell Gammon (Manager), Mark Asherson (senior manager) and Bivek Sharma (partner) in Accounting and Tax Technology Services , KPMG LLP