Dennis Keeling

VAT Reverse Charge - what a mess

VAT Reverse Charge - what a mess – horses and stable doors come to mind – why should so many innocent traders be inconvenienced, in order to fight the few fraudsters perpetuating the Carousel Fraud across Europe.

On the 1st June, 2007, the UK Government will legislate that the movement of selected types of goods will be subject to Reverse Charge. The change of law, which has cost the country dear in terms of Maggie's 'rebate', is HMRC's belated attempt to fight the fraudsters who operate this lucrative loophole in EU VAT.

It’s taken the UK Government nearly 2 years to get other EU states to agree to allow the UK to change its VAT policy on mobile phones and computer chips – the main goods being used by the fraudsters. Its not surprising that HMRC’s advance notice gave fraudsters a good 'heads-up' and then the resulting implementation was so constrained (compared to the original declared intentions) that like the weather - its certainly watered down (but not for businesses and software authors).

Now that the legislation is about to come into force reliable sources suggest that the fraudsters have already moved on to IPods and Mont Blanc pens. HMRC believe it could take another year to extend the scope of the goods affected by its Reverse Charge process.

For those businesses affected – those that wholesale computer chips and mobile phones – the effect on their business processes is quite traumatic. Whist modern financial systems can cope with EU Acquisition Tax – a similar concept to Reverse Charge – these systems will still have to be upgraded (or re-configured) to meet the complex demands of Reverse Charge. There are de-minimis limits and Reverse Charge Sales Lists to be contended with – not as complex as originally envisaged – but still a significant burden on innocent traders.

HMRC is doing remarkably well at bringing the fraudsters to heal, not by Reverse Charge, but by jointly and several powers to stop all VAT payments to anyone in the Carousel loop. But this action is also affecting perfectly law abiding businesses. Already one 'innocent' trader has had to close down its business when HMRC refused a substantial VAT rebate.

BASDA estimated that these draconian measures would affect at least 15,000 companies in the UK - the computer chip companies have resellers 12,000 alone. Not all would need to upgrade their software, only those wholesaling significant numbers - the de-minimis invoice limit is £5,000.

For more information on the fraud see the http://business.guardian.co.uk/story/0,,2089860,00.html

Or HMRC's notes: http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageVAT_ShowContent&propertyType=document&resetCT=true&id=HMCE_PROD1_026185

HMRC planning sweeping changes to VAT Systems

HMRC is in deep discussion with the software industry about the best way to fight its burgeoning 'Carousel Fraud'. The current suggestion is the treatment of certain items as 'Reverse Charge' when sold 'business-to-business' (b2b), but as normal VAT when sold retail.  The trading company would have to send a Reverse Charge Sales List (RCSL) to HMRC showing the monthly sale of these items under the reverse charge rules.

The concept of Reverse Charge has already been implemented in most computer systems but only for imports from EC countries.  This new initiative will be for local b2b sales of the specified goods (Mobile Phones, Computer Chips, Memory Cards etc).  We would have to upgrade our VAT systems as well as provide the ability to send the new Reverse Charge Sales List.

HMRC expects to have EU approval for these changes before the end of the year - unfortunately it may be a further 6 months before the software industry is able to deliver updates to its products.

For more information see:- http://customs.hmrc.gov.uk/ - Business Briefs - 2006 - 14/06.

The business software industry continues to consume itself

Over the last 5 years I have seen massive and possibly irreversible changes to the business software industry.  The larger developers are continually acquiring their innovative competitors and the channels to market have moved from direct sales to sales through resellers and partners.

When I published my first Thesaurus of Business Software in 1998 there were over 700 different financial systems in the UK – today I estimate that there are less than 100 – many in ‘maintenance-mode’.  With the launch of the PC in the early 80’s we had many young enterprising start-ups – names like Sage and Pegasus.  Today it’s unusual to hear on any entrepreneur starting up a business to develop financial software.  Customers are constantly complaining about the few choices available.

In the 90’s it was normal practice to replace financial systems every 5 years. This year’s ICAEW ‘IT in Business Survey’ shows that the vast majority of customers have owned their business systems for over 5 years  and over 60% have no plans to change.  The reasons are obvious:-

·    since the Year 2000 problem, there have been no compelling reasons to change business systems

·    the disruption to the business in changing systems

·    no major shift in computer technology to suggest a change (Windows/Intel dominates).

This also impacts on software upgrades.  The ICAEW survey shows similar figures for upgrading – with over 60% having no plans to upgrade.  One major software company continues to complain that a large proportion of its customer base is still using its DOS version (it was reliable!).

In the last few weeks we have seen yet again many software ‘stars’ acquired – Pegasus, SunSystems, Intentia.  We have also seen the rise of the ‘Multi-Package Reseller’ with Graham Wiley’s (ex founder of Sage) TSG (Technology Services Group) leading the revolution - selling a wide range of packages from Sage Line 50 to SAP.

My family (all artists) use Apple computers with their superbly integrated hardware & software.  The business community (other than graphic designers, architects and advertising agencies) moved away from Apple in the early 90’s when the PC became the common desktop computer. Will Apple’s intuitive user interface and reliability encourage the business community back?  Steve Jobs with his Apple Stores, iPod, and iTunes and seems to be the only successful innovator in the industry at the moment.

Has XBRL come of age?

The eXtensible Business Reporting Language (XBRL) has been around a long time - but it has never really taken off.  It seemed a good idea at the time but it has been hopelessly 'overcooked' by accountants trying to ensure it covers every eventuality.

XBRL has recently been given a boost by Lord Carter, who in his report on HMRC's e-Filing has recommended the future use of XBRL for Corporation Tax and Companies House returns.

Unlike standard XML messages, which can be mapped directly to the underlying software data model, XBRL  requires a user interface to be able to map the unique General Ledger Charts of Account to the many and varied XBRL  Taxonomies.  For this reason few software developers have installed an XBRL interface - providers of Final Accounts / Tax Software are the only ones supporting its use at the moment.

To tackle the mapping problem XBRL International has now developed two forms of XBRL:- XBRL FR – its definition for a financial reporting language discussed here; and XBRL GL – its new definition for direct data mapping. XBRL FR has been around in various versions since 1999, but XBRL GL is still in its infancy and not yet established.  It has had little interest from software developers who find it difficult to accept that there is one data definition for the ' whole world'.

The standard XBRL FR taxonomies currently lack the presentational structure required to make simplified financial reports easy to use. Developers of packaged financial software would be able to implement elementary support for XBRL FR as a standard feature in their applications, if the Taxonomies were simplified and the presentational structure made more workable. Most National Taxonomies (GAAP) have over 15,000 items to map to.  If a simplified version could be developed, to include say the 100 most important headings, the mapping would be easier and the take-up more positive.

There are two reasons to provide minimal views. Many application developers will not wish immediately to make the significant investment required to implement full flexible support for XBRL including extension taxonomies: early packaged implementations are likely to be simple.  Moreover, once developers have implemented full flexible support for XBRL FR, the task of mapping to XBRL concepts will fall to the customer: most customers of packaged software developers will not have the resources or expertise to map to sections of a large complex taxonomy.

Every standard taxonomy should provide, for example, a balance sheet, income statement and cash flow statement containing a minimal sub-set of concepts that may reasonably be reported under that standard. At present, standard taxonomies are designed to present only a super-set of the available concepts.

As most financial software packages can produce standard trial balances, enabling XBRL FR support at that level would reap exceptional rewards during auditing and consolidation. The improvement of taxonomies is therefore key to helping software developers deliver value to their customers.

If XBRL International wants to get wider adoption of XBRL it needs to simplify the human interface and get the external accountants to start to use it in their Consolidation and Final Accounts Preparation - the only demand is coming from the Government.

Lord Carter stirs it up

The Chancellor published Lord Carter's review of HMRC e-Filing on the same day as the Budget was announced - I seem to remember something about burying bad news came up once before!

Lord Carter's report isn't all bad news - yes Taxpayers and Companies will have to file their Self Assessment, PAYE, Corporation Tax and VAT returns electronically.  Some have become mandatory already, others will follow in 2008 and all should be in place by 2010.

He does not mention HMRC's Construction Industry Scheme (CIS) or the Standard Audit File for Tax Purposes (SAF-T) which are two on-going projects with HMRC. 

He does want to use XBRL for accounts filing, rather than PDF, but only after the initial implementation has 'bedded down'; until then he wants joint filing to continue.

He does agree that the Software Industry should become more involved with HMRC's plans and it should be given at least 6 months to test the changes to customers systems.

Interesting that Lord Carter also takes the opportunity of having a go at HMRC for not implementing NINO Tracing and Verification which he recommended in his last report (2001). This, he says, 'undermines the quality of data that an employer is capable of providing to HMRC' - so much for the £3,000 fine HMRC is imposing for data quality on PAYE year-end submissions this year.

His report can be downloaded from:- http://www.hmrc.gov.uk/budget2006/carter-review.htm

HMRC Construction Industry Scheme - is the construction industry ready?

London, Friday 17th March

HMRC hosted a one-day think-tank to look into the preparedness of the Construction Industry for the changes to HMRC's specialist Tax scheme due to start in April 2007.

Delegates form large, medium and small companies as well as trade bodies, and HMRC came together for an open fact-finding session at the Treasury.  It quickly became obvious that most companies affected by the scheme were already behind in their preparedness for these significant changes to the scheme.  It did not matter if they were small companies with manual systems or large corporations with complex computer systems, they all agreed that they had not given enough thought to the changes involved.

There are over 250,000 registered contractors and over 2 million sub-contractors on HMRC records that will be affected by these reforms.

There is obviously a communication problem - yet most companies are aware that there are changes, but few understand the extent and the implications of the planned changes.

Certainly the medium - large organisations with computer systems have some significant upgrade problems - some of their suppliers like Oracle and SAP still have not given any guidance on the extent of their upgrades (if any).  It is not only the construction industry that comes under the scope of these changes - it is any employer who employs sub-contractors - like ICI, John Lewis and most of the local Councils.

As an industry we have to prepare our customers for not only upgrading their software but more importantly the cleansing of their data files - bringing them into line with HMRC's new CIS system. See our web-site for the detailed requirements www.basda.org/CIS.

Without sounding like scare mongers - how do we get the message across that the new CIS is a complex upgrade?

HMRC to file Tax Returns via BACS

London, Friday 17th March

The Editor-in-Chief of AccountanyAge asked me during a live web-seminar on Wednesday what I thought about the recent announcement about HMRC using BACS for Corporation Tax Filing - it was the first I knew about it.

On further investigation it would seem that this 'Blue Sky' thinking was prematurely announced by VOCA - the banking body responsible for BACS.  HMRC was embarrassed by the early announcement and of course all parties would want a representative from BASDA on the proposed steering committee.

We have found that tax filing - in particular Corporation Tax - is in the main filed by intermediaries - accountants and tax advisors, rather than by the company itself.

Of course most medium to large companies pay their Payroll and Suppliers by BACS - either directly to BACS or indirectly through their bank's proprietary systems.

It will be interesting to see how many of the Tax intermediaries are linked directly to the BACS network.

Where are the Bill Gates' of the future?

Salford, Thursday 16th March

At my annual presentation to the Students at Salford University about 'Trends in the Software Industry' I was concerned to learn that not only are IT admissions down at most UK Universities but admissions are also down in the USA as well.

Having just returned from the Genesis Kick-Off in Athens, the Greek, Cypriot and Lithuanian University participants all had healthy admissions for their IT streams - what has happen to the West?

The sparkle - the attraction of technology, that encouraged Bill Gates, Larry Ellison, Steve Jobs and Hasso Plattner to move to computer engineering seems to have gone. Is it a reflection of the post dot.com era recession or is that youngsters today were born into the computer era - it was not something new? 

How do we get it back?

How do we inspire the greatest brains in the world to return to IT?

AccountancyAge Web-seminar

London, Wednesday 15th March, 2006

AccountancyAge hosted a web-seminar entitled ' Software Strategy and Selection' for its Insider Business Club, go to www.insiderbusinessclub.com.  - This is a club set up of Finance Directors who have a weekly Web-Seminar on a variety of topics.

Damian Wild, Editor in Chief of AccountancyAge, acted as the moderator with presentations from Mark Holland from the ICAEW IT Faculty, Dave Hanley - Industry Leader for Financial Services Oracle and myself.

We discussed the huge amount of regulation and compliance that is affecting businesses today and how Finance Systems could assist in minimising the risk of compliance.  We outlined the modern business selection techniques and how these had changed from the traditional ITT.  It was agreed by all presenters that modern system selection was based more on processes than functions and features.

Genesis Kick-off

Athens, Monday 13th March, 2006

This is the start of the Dennis Keeling Blog.

I am attending the Genesis Project Kick-Off meeting in Athens with 10 other partners who have secured EU funding for an eBusiness Portal for the emerging EU countries.

The partners include several Universities, Users, Consultancies and software companies:- SAP, Logo, Singular Software and an SSA Global partner.