Tax : THREE REASONS TO REDUCE SPREADSHEET DEPENDENCY

Spreadsheets have been a staple tool of finance for over forty years. They're ubiquitous, with 1.2 billion users of Microsoft Office worldwide, and 80% of businesses currently rely upon them for tax purposes. But are they still the best tool for the job?

In our 2019 Tax Professionals Survey, 35% of tax and finance professionals said they are already looking to move away from using spreadsheets following the introduction of Making Tax Digital (MTD). There's a growing sense that, with the introduction digital submissions and digital links, MTD may well present an opportunity to begin to rethink how we manage compliance data and carry out calculations.

Error prone

The very thing that makes spreadsheets so versatile is also what makes them fallible. Yes, they're easy to operate and can be used for a multitude of purposes but they also require the tax and finance teams to correctly configure and manually populate them, often by sourcing data from a range of different systems, group companies or even from third parties.

The slightest mistake can (and does) result in errors and this risk increases as the amount of data to be processed grows and the complexity of calculations in spreadsheets sheet increases. A conservative estimate is that 88% of spreadsheets contain errors but based on our experience in reviewing our customers VAT calculations the real number is even higher.

To limit the capacity for error, businesses typically restrict ownership. A select few individuals are tasked with creating, managing and updating the data but this too can cause problems. Isolating the document inevitably results in a knowledge silo and key resource dependency, heightening risk because when these individuals leave, they inevitably take the understanding of how things have been calculated historically with them, leading to further difficulties in the event of an official audit.

Inefficient

This brings us on to the second issue with spreadsheet use: efficiency. Manual processes reliant on spreadsheet-based processes are notoriously time intensive. Collating, identifying and inputting data can take up huge amounts of time. For example, we found that our corporation tax customers historically spent up to 75% of the compliance cycle on data input and VAT seems no different.

Devoting so much time to an essentially mundane task is a waste of valuable resource. For many CFOs the focus is increasingly on reducing compliance workloads to make better use of skilled inhouse resources. It's a move welcomed by tax and finance professionals, with our survey revealing 68% want to use automation to reduce the time they spend on compliance workloads.

Risky

The third issue with spreadsheets is the risk they represent. Auditors routinely highlight spreadsheets as the single biggest cause of non-compliance. Errors can be costly, resulting in investigations by the tax authorities and time lost in managing the investigation, as well as the prospect of reputational damage, possible litigation, and financial losses.

There are plenty of examples of businesses falling foul of spreadsheet errors as catalogued by theEuropean Spreadsheet Risks Group. These includeMarks and Spencerwhich suffered reputational damage when it reported a growth in group sales (when they had in fact fallen) and drinks firmConvivalitywhich saw a £5.2m spreadsheet error contribute to a £14m blackhole that brought it near bankruptcy.

Another notable example is J P Morgan which back in 2013 carried out an investigation to establish why its VaR (Value at Risk) was 50% higher than the preceding year. The JPM Task Force deduced that the modeller had used the wrong formula, dividing by the sum rather than the average, resulting in the large discrepancy.

Such examples highlight the problem of both spreadsheet ownership and control as well as the difficulties in tracing and identifying errors. But spreadsheets also create risk through their inability to scale. As regulatory demands change, and we see the need for near-real time data access and more frequent reporting, so businesses will need systems that can provide drill down detail in near or real-time. The humble spreadsheet will surely struggle with such demands.

Combat these issues with a compliance engine

The good news is that the digitalisation of tax will probably see the balance shift so that we are no longer so reliant upon spreadsheets. MTD is already forcing the pace of change with the introduction of technology in the form of digital linking and digital submissions. This is seeing the emergence of regtech compliance engines that provide end-to-end control over the calculation, preparation and management of VAT compliance- our own AlphaVAT solution is an example of this - which can reduce the risks and reliance on spreadsheets in a number of ways:

1. Mapping and automatic extractionof sales and purchasing datafrom internal and external systems, massively reducing workloads. Automatic data checks that ensure content and formats are correct and potential errors are identified within source data at a transaction level
2. HMRC compliant digital linkingbetween the VAT source records and MTD filing software.
3. Data filteringallowing large datasets to be more easily segregated, spot checked and queried enabling simpler preparation and review.
4. Error handling which automatically blocks incorrect reporting behaviour and presents error messages that outline corrective actions.
5. Track dataallowing data to be traced back to source, making it far easier to perform digital audits.
6. Control access using dedicated access rights that allow data access to be assigned on an individual basis making it possible to establish who made changes and when to help with auditing.
7. Automate calculations for groups or partial exemption special methods as well as transactions and adjustments, meaning that the user no longer needs to manually create formulas in spreadsheets, significantly reducing the capacity for error.
8. Perform manual adjustmentsas the user would in a spreadsheet, but with the added benefit of flags and alerts which can be used to bring issues to their attention.

If you would like to learn more about how AlphaVAT or our broader MTD compliance suite can help reduce your compliance risk, or if you have concerns around MTD in general, then please give us a call on 01784 777 700.