We are honored to speak with Richard Asquith on this episode of our VAT Talks. He is an awarded VAT expert working as VP Global Indirect Tax at Avalara and writes the daily Avalara global blog that is read by over 1 million readers per year. Richard entered the VAT world because he was promised a calm work life but since he entered 30 years ago, his work life has been everything but calm. Join us to find out what he means with a “tsunami of change in VAT” and why the time has come for disruptive technologies and new thinking.
How long have you been working in VAT and how did you end up in this field of work?
“I ended up in VAT shortly after I qualified as an accountant in the United Kingdom with the big 4 roughly 30 years ago. The answer that was given to me on the question why I should work in VAT, turned out to be a massive lie: When working in audit, I wanted a quiet life at work with easy hours, so I asked the auditors, ‘what’s the most boring bit of auditing’, and they said, ‘well, go to taxation’. So, I went to the tax department on the next floor and asked, ‘alright, in taxation, what’s the most boring field to work in’. All tax experts said, ‘go to VAT. VAT is so sleepy, it’s so easy. All you have to know are the tax rates and that’s it’.
So, I decided to work on VAT and went to work all across the world, including Russia, Hungary, France and the USA. When they told me that VAT was the most boring field to work in, they absolutely lied. There has been a tsunami of change coming at us in VAT, which started a year or two ago. Transaction-based reporting, Covid 19, Brexit - all of this is just overwhelming. I have been blogging for a long time, aiming at a blog a day. Years ago, I did not know what to write about, but now there is almost too much going on. The quiet, boring life I was promised in VAT, was an absolute lie. (laughs)”
Could you tell us a bit more about yourself and the current work you are doing?
“Since 6 years I have been Vice President for indirect tax at Avalara. It is my job to read the legislation, to understand the changes that are coming and to keep up with them. Some of these changes are great reform, but fiercely complex. It is my role to unravel them and make them understandable and consumable. I then turn to our clever engineers and technology experts, so that they can automate and keep up. I am also turning to external markets, our clients, our prospects, our partners to explain developments and implications. The past months I have also been on TV a lot and in the Financial Times. For me, it is ridiculous that a VAT person should be on television. They should be hidden in the basement, analysing whether the VAT rate has changed over the past years. But these times are over.
In VAT, I am most passionate about cross-border VAT. I love the rich cultural mix in it because all national VAT regimes really reflect their national specificities. The other thing I love about VAT is that it is so crucial for governments. Governments love it, it’s fast, it’s easy to change, it is hard to commit most forms of fraud. Economically, it’s common sense and very sound, it doesn’t tax income generation. With the financial crisis in 2008 and the current pandemic, VAT has just been pushed to the forefront of economic fiscal planning. Covid 19 has shown that VAT is not just a tax, it is a fiscal measure for governments. Cutting VAT, delaying payments, speeding up credits, giving deferrals; all of this has shown how VAT can support business and consumption during difficult periods.”
The UK has launched the second phase of its Making Tax Digital. Tell us a bit what this means for companies and what the motives of HMRC behind this new VAT reporting are. What will come next?
“Her Majesty’s Revenue and Customs, in short HMRC, is a non-ministerial department of the UK Government, which is for instance, responsible for the collection of taxes. Making Tax Digital (MTD) for VAT is the first phase of HMRC’s plan to digitise VAT recording and VAT reporting. The real motivation is to drive out errors and fraud from the tax process. HMRC calculated that it is losing around 11 bn GBP per annum. That is our VAT gap.
It is also about making HMRC more efficient and more communicating. It is not only about receiving data but also about being able to analyse it at transactional level, to report back to the taxpayer and to automate the whole process. So, it is about making it actually a better experience for all sides. That’s the positive side and broad ambition. HMRC started with VAT because it is relatively straightforward: if you can get down to the transactional action, then you can find out where the problems and errors are, and whether there is fraud.
There were always two phases planned for MTD for VAT. Phase 1 implied that from 1 April 2019, around 1.4 million taxpayers had to move to digital filings of the nine boxes of VAT return data. Essentially it meant that they had to start using an API to file their returns. Phase 2 is compelling everyone to digitise their records. The headline is: there will be no more manual intervention, no manual use for calculations or cut-and-paste in excel.
The change with phase 2 is very interesting, and very important for the long-term. It reflects the ultimate goal of HMRC and any tax authority: they want access to and control of transactional data, so that they become the ‘source of truth’ for tax data. This will enable tax authorities to calculate the taxes and tell taxpayers what their taxes are rather than relying on self-reporting of the taxpayer, which has been around forever. An astronomically important shift in power is going to happen: Tax authorities will be able to judge what amount of VAT is owed. With this, tax authorities will be on the frontfoot, whereas the financial controller (e.g. the CFO or Finance Director) has to catch up.
I always talk about it being a coup d’etat in the tax world because tax authorities will ultimately take control of financial information and will have much more power than any Finance Director. I am convinced that it will also spread to other taxes, not just VAT.
The next stage in the UK will therefore most probably be something like transaction-based reporting, as you have seen in Spain or Hungary. That will be the moment when this coup d’etat will happen. However, nothing has been announced by HMRC yet. I just hear many public officials who were behind the MTD officially saying in the press, ‘if the UK had introduced real-time reporting properly back in 2015, it would have had a much easier Covid-19 crisis from an economic point of view. Real-time reporting would have provided lots of data about the true live performance of companies, and insights into the question whether companies really suffer because of Covid-19 or something else.”
All companies are using digital services or even provide them. Why do we often hear that integrations with tax administrations are so costly or difficult? Is it really the implementation and skills at the tax authority or has it more to do with the fact it is “just tax”?
“I want to highlight some problems that cause opposition to transaction-based reporting. Problem number 1 is consistency. Countries unfortunately all go their own way. It is difficult for businesses to cope with this because accounting systems or ERPs are not able to build into their systems multiple ways of transaction-based reporting. It is too complex, too complicated. They don’t provide for this service in their native accounting system. So, you have to go outside and every country has its own system. That is expensive for business. Problem number 2 is that tax authorities do not give enough lead time. Sometimes they rush out these reforms without proper consultation. That results in businesses having to go to outside consultants, or doing manual work, which is what we actually want to avoid.
Problem number 3 is that tax authorities do not always share their objectives in the beginning of the consultation period or change their objectives throughout. That is very confusing for businesses, advisors, software producers and others. When we know that a lot will still change before the launch, we will not start to code and that has been a problem with all three transaction-based reporting reforms in Europe - so, Hungary, Spain and Italy. Problem number 4 relates to communication. Tax authorities do not always explain clearly what the rules, incentives or measures of failure to implement are. Businesses experience difficulty around language or support from the tax authorities. Problem number 5 stems from different schemes, file types, or formats for exchange of data. Again, that adds to complexity and difficulty in costs and planning for businesses.
And lastly, problem number 6 is that tax authorities miss out in properly consulting with businesses, accounting software companies or tech companies like summitto. It should not be about introducing a new type of reporting or new type of file, since this always implies more time to plan and more costs. It should be about introducing processes that bring other benefits to businesses. That could be confidentiality in the case of summitto, or cost-savings in internal processing that e-invoicing companies advocate for, if you actually use VAT e-invoicing systems properly. Tax authorities have to make it a win-win situation, not just imposing extra costs, or extra processes for businesses, especially in the time of Covid-19.”
More and more EU Member States are moving towards real-time reporting, such as Germany, France and Slovakia. What do you think of these developments?
“I will answer this more broadly. As one of summitto’s blogs points out correctly, also the European Commission is looking at harmonised transaction-based reporting. Just to be clear, I am very positive about what the European Commission is trying to do. I think it is a great initiative but I am afraid the horse has bolted. Now it is too late to harmonise pan-European, or pan-EU transaction-based reporting. Too many countries have made too many plans already. The more advanced they are in their own regime, the less likely they are going to change it because of politics. We always forget that tax authorities do not mean to be awkward or novel but they are subject to a lot of lobbying that waters down initiatives.
There are too many powerful lobby groups that will prevent us from sort of harmonizing. France tells the whole story to me - it is obviously saying ‘we are going ahead, we are not going to follow the Italian model, we are going to follow the Mexican model’. This links back to the previous question, in which I lined out what not to do, and emphasized the importance of consistency and easy implementation. France is doing its own thing, and that is a problem. I think the European Commission suggests looking at three models: reporting at the national level, reporting at the pan-national level and having data at the European Commission level. Italy and France have already decided that it is going to be at the national level. Tax authorities have spent money and told their taxpayers to invest. These tax authorities will not move away from that, they have made their mind up. So, the European Commission looking at these three models is great, but too late.”
We see that many countries started to introduce invoice reporting systems in different ways. Do you think governments take data protection and confidentiality sufficiently into account?
Some of the countries have been better than others. I think Italy has been the closest to good, I would rate them top-of-the-class because of the following reasons. Reason number 1 is, it has introduced mandatory e-invoicing to get maximum chances of success and maximum buy-in from taxpayers because it makes taxpayers happy. You want reforms that benefit the taxpayers and there is no doubt about the fact that e-invoicing can deliver big cost-savings for businesses. Companies and taxpayers are thus much more likely to embrace any kind of regime that saves them money and has a cost-benefit. Most of the other regimes have introduced a new reporting type, so that accounting systems need to be changed and recoded. This makes reconciliation really difficult: What you report to the Spanish differs from what you report to the Italians. So, does that tie back to your VAT return? If you got Spanish-Hungarian transactions or Spanish-Italian transactions, you told the tax authorities slightly different things because they ask for slightly different data and formats. Reason number 2 is that it is really going to the invoice. The invoice level is key. The invoice is a legal document, so that is where the calculation of VAT and the reporting should be done. The VAT Directive is also all about the invoice and not about the VAT return. That is why I like the Italian system and the South American systems most.
When turning to confidentiality, I have not heard about any data confidentiality problems in existing real-time reporting regimes. I am sure though there will be problems but I have not heard of any. But look, an invoice is loaded with hugely confidential and embarrassingly reputational issues. There is no doubt about that. And the way it is done in most countries is with pretty insecure platforms, so yes, we are gambling with that. I agree with that.”
A couple of years ago you posed the question “Will EU SAF-T reporting be the death of VAT returns?” SAF-T does not seem to become the standard in the EU, do you think that real-time reporting can help to “make an end to VAT returns”?
(laughs) “Yes, real-time reporting is the ‘death of the VAT return’. That is where we are going, it is happening - so embrace it. If tax authorities could start again with the VAT regime, they would not have VAT returns and periodic, late and limited information. Poland has already effectively dropped the VAT return, Norway is next I think. I think SAF-T was withering as a format. It is a nice idea, but as probably everyone knows, the problem with Standard Audit File for Tax is that absolutely nothing about it is standard.
After Brexit, do you think that VAT fraud is going up or down in the UK, and why?
(laughs) “In theory it should be less, because the UK has introduced its e-commerce Package on 1 January 2021. This is about tackling the VAT we miss in e-commerce - about 1.5 bn GBP. Also, the UK was the first economy that faced Missing Trader Fraud and the first to tackle it with domestic reverse charge (e.g. on construction, commercial electricity). The problem is, that using reverse charge is undermining the whole VAT system. It makes it complex, and invertedly, takes out a lot of important cash support for small businesses who rely on delays in charging VAT and then paying it. This highlights that the measure we and most other countries have used - reverse charge - is counterproductive. So, in short, we have addressed Missing Trader Fraud, but largely through the wrong measure. We need to fix it with more robust, efficient long-term solutions like transaction-based reporting.”
When you state that summitto is a potential disruptor, what do you exactly mean by this?
(laughs) “VAT is a massive source of income for tax authorities but also a massive source of fraud. It has risen up to the top of the priority list of tax authorities and it is exciting that tax authorities look to digitisation to solve the problem. Covid-19 has accelerated this. I think tax authorities are desperate for a solution. That is fertile ground for disruption, new technologies and new thinking. It feels like time has come for new technologies like blockchain. Blockchain has always been a technology that needed a reason. Around VAT fraud, I think it got great potential because it is important that there is no single source of failure. So, with regards to this question my two points are: great potential and great need. It’s very exciting and innovative what you are doing.
Do you have some last words for the readers to enthuse them about VAT?
The longstanding problems of VAT fraud and the economic crisis around Covid-19 have propelled indirect taxation, and in particular VAT, into the front thinking of Finance and Treasury Ministries around the world. They see it as the solution to many problems with regards to supporting businesses and consumers through raising huge new levels of taxation that would be needed to pay the Covid bill. A lot of action will be put in VAT and also cross-border VAT, which in itself has ballooned in importance because of e-commerce.
We would like to thank Richard again for his time and for giving his perspective on VAT. The opinions expressed in this article are personal. If you have any questions, suggestions or if you want to be our next interviewee, do not hesitate to contact us via firstname.lastname@example.org