E-filing Languages

NIGEL POWELL asks if XML/XBRL is the technology of the future for e-filing.

WHAT IS SO exciting about e-filing? Well, not much you do not already know unless you appreciate the underlying technology and the possibilities it opens up.

The technology that powers e-filing is more intriguing than the concept itself. Imagine a situation where the agent could gather information to complete a client's tax return without having to request it from him, and where the return itself could be largely pre-populated. Just think of the time saving that this would represent for both the adviser and the client on what is currently a laborious task.

The technology in question is XML (Extensible Mark-up Language) and its big brother XBRL (Extensible Business Reporting Language). It stems from the United States and has been the technological driving force behind the United Kingdom Inland Revenue's self assessment online and the soon to be corporation tax internet filing initiatives.

What does XML do?

The problem that XML addresses is that the English language is often uncertain when used to impart an idea. For example, the vegetable that we know as a 'courgette' is known in the United States as a 'zucchini'. It is exactly the same thing, we just have different ways of referring to it. The same problem exists when dealing with data items.

XML is a specialised language for exchanging information on commonly understood subjects. It comprises a series of accepted common terms, or 'labels', to describe something so that no matter how anyone names them, others will know what is meant. It even allows disparate databases to exchange common data without the need for one to know the database structure of the other.

The Revenue, in co-operation with other interested parties, has created what is called a 'taxonomy', a definition of accepted labels which, in this specific case, define the data items needed to complete a United Kingdom self-assessment tax return. This in turn allows individuals and agents to file their returns to the Revenue via the Government's Internet Gateway using XML as the basis of their transmission.

The clever part is that XML can work both ways, benefiting the taxpayer and his agent as well as the Revenue. Given that the Government wishes to increase the electronic dialogue with its citizens, the Revenue has raised the prospect of providing the taxpayer and his agent with much of the information that is required for the self assessment process. This initially may mean that, subject to satisfying all the necessary security requirements, agents could very easily receive their client's tax details that are held by the Revenue, including P60 pay and tax figures and the details from the P11d form, via the Internet. The data would then simply pre-populate parts of the client's self-assessment tax return, making the data input simpler and less time-consuming, as well as reducing the risk of human error.

Without venturing into the world of science fiction, using XML this is already feasible via established links to the client's stockbroker, banks, building societies and property agents who already hold the majority of information required for the self assessment return. All sources of income or outgoings could be extracted automatically from these parties and sent to the agent.

The data can then totally pre-populate the return, requiring the client simply to review and confirm matters before submission.

So will XML put everyone currently completing tax returns out of a job? No, but it is inevitable that the mechanical part of completing tax returns should become increasingly more automated. This is a natural progression from the fact that tax software already assembles the data items, computes the liability and allows the user to submit returns by paper or electronic means. It is already possible for a taxpayer either to e-mail an electronic version of the annual tax questionnaire to his agent or ask to complete the form on-line. The data is then entered onto the agent's computer electronically without transcription via the keyboard. Estimates of the time savings this can facilitate vary, but 70 per cent of the compliance costs seems realistic.

XBRL

XBRL is the newcomer and underlies the Revenue's prospective corporation tax Internet filing initiative. It began in the United States where the American Institute of Certified and Corporate Accountants was one of the founder members of the group which created XBRL as a means to overcome the issue of publishing financial statements over the Internet. It had in mind to do this in such a way that anyone could analyse the information in any way, rather than rely solely upon generally accepted accounting principles, which to many are just jargon.

The vision within the accounting profession is that of accounts being easily published in different formats and for the data to be exchanged across various technologies. At present, there is no common format for enterprise data reporting and therefore information is continually re-keyed.

XBRL works in a similar way to that of XML in that it defines the accepted terms commonly used, and effectively puts a 'dictionary behind the scenes', allowing us to read financial information in terms that can be readily understood. It provides the financial community with a standards based method to exchange, prepare and publish in a variety of formats and extract and automatically exchange financial statements. It is not about establishing new accounting standards, but making better use of the existing ones.

In the United Kingdom, the Institute of Chartered Accountants in England and Wales has created a draft taxonomy for financial statements in the United Kingdom, and it is this that the Inland Revenue has seized upon for the e-filing of corporation tax. For years, a peculiar and anomalous situation has existed whereby companies are required to file sets of accounts with Companies House for statutory purposes and another set to the Revenue. This is in addition to completing a self-assessment tax form in which companies must re-enter very much of the same data as was supplied in the accounts.

Although e-filing has been heavily promoted by the Revenue, because of the need to post-in a set of paper based accounts, it has not proved popular. The problem lies in the accounts since they remain a very individual form of communicating the essential items of financial data. XBRL overcomes this, since anyone reading an XBRL set of financial statements can 'slice and dice' the information any way he chooses XBRL makes it possible to compare accounts for different companies and years without a degree in accountancy..

Commentators in the United States recently said that had Enron's accounts been published in XBRL, maybe market pundits would have foretold the crash earlier. For now, if XBRL is adopted widely by companies, then investors could use HTML Internet connections to their different corporate investments by means of a simple spreadsheet to get a series of specific relevant pieces of information direct from published accounts. They could do this by simply asking for the spreadsheet to be updated automatically by an Internet connection.

What is so exciting about XBRL? Suppose you are the accountant for a limited company whose accounts are prepared in a bookkeeping system that is XBRL-enabled. Then the accounts go into final form and you need to ask for a tax reserve. The press of a single button would automatically produce the corporation tax computation fed through from base information to final accounts and tax computation without further analysis or input.

Do XML and XBRL have a future?

It is clear that the Government sees a future for XML and XBRL. For XML the future is secure as many software companies are accepting it as a key strategy, but some questions exist for XBRL. Perhaps the main question is how long will it take for widespread use? This will largely depend on how quickly it gets adopted both in concept and in various software products, and how well known it becomes. Unless demand rises, there is a risk that accounting software houses may not see sufficient profit incentive to build XBRL into their products. Whether people will view the concept as one that extends existing means of communicating clearly or whether by removing obfuscation, it will be seen as another encroachment of 'big brother' or another good idea consigned to history, simply dying through apathy.

Those who would consign XBRL to the waste bin might reflect upon the words of Thomas J Watson, president of IBM, who in 1943, said, 'I think there is a world market for maybe about five computers ...'.

Nigel Powell is product manager for tax products at Solution 6 (UK) Ltd. For more information on XBRL, visit www.xbrl.org.

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