VAT compliance is a phrase you have no doubt heard on a regular basis, unsurprising, given that globally VAT is the most popular consumption tax system. VAT has a variety of names depending on where in the world you are located, TVA -Taxe sur la valeur ajoutée, in France, IVA - Impuesto sobre el Valor Añadido in Spain and MVA - merverdiavgift, in Norway, for example. Simply put it is the indirect tax chargeable upon the sale of goods and services.
VAT compliance refers to the process of the determining, recording, reporting and filing obligations for businesses operating in any country with a VAT system. It involves not only the tax authorities but all the buyers and all the sellers along the economic chain, through to the ultimate consumer.
Understand the challenges in your VAT compliance journey.
1. Complexity is inherent.
All countries across Europe (whether or not they are members of the European Union) have a ‘value add’ starting principle in their tax landscape. In fact, the concept and systems for value added tax have been part of the European tax landscape for many years. But, aside from this theoretically shared concept of VAT, there aren't many similarities, which is where the complexities arise. Any type of cross-border trade, such as buying or selling products or services from different countries, means that VAT-registered businesses will have different VAT rates and obligations.
For example; each country will have different VAT registration rules, different VAT rates and VAT exemptions. They will each require slightly different parts of your data - a different slice. There'll be different requirements for supplementary data and documentation. There will be country specific rules regarding the VAT recording format and or around the method of submission. Even the rules for reporting dates required related to the transactions will differ - it might be the invoice date, the date of supply or the payment date. Not to mention, the language and cultural challenges across different regions.
There’s no standardisation in practice, even EU member states have the freedom to interpret the EU Commission’s Directive in accordance with their own ways of working - so there’s no harmonised EU VAT system. Each and every country you work in, buy products from or sell to means grappling with a new set of VAT compliance challenges. So where at a macro level, you’re working to get the same result - accurate VAT calculations and compliance - getting it done in practice is a very different story.
2. Remember VAT is a trust tax - calculation is down to you.
One key point to remember is the trust element - because when it comes to VAT, the tax authority is trusting you to calculate and tell them what you owe and to do it accurately, on time and according to their specific rules. They trust you to tell them what you owe - but if you get it wrong there can be huge penalties.
3. VAT compliance creates challenges for industry sectors and cross-border trade.
For example, the retail sector often means a high volume of invoices with many line items and VAT complexity is created thanks to many different rates across product types and tax jurisdictions. Children’s shoes in the UK will be treated very differently than coffee in Italy - attracting different liabilities.
Some sectors have elements of trade that are VAT exempt, such as medical care. You won’t charge VAT yet you also need to be sure you don’t try and recover it from related costs. How do you manage this within the rest of your process and ensure it is accounted for properly?
Consider a case where a manufacturer is bulk buying materials possibly for use in Spain, but procurement could from outside of Europe. What should the invoicing for this cross-border transaction look like, how should it be reported, and what is the right amount to charge? If you add scenarios of working and maybe designing in the cloud or manufacturing remotely, it’s also often a challenge to work out who is ultimately liable for the VAT.
4. Be aware of the different challenges VAT compliance brings across your business functions from finance and procurement to sales and logistics.
Within a business, most functions hold information and data that is important and often needed or required for VAT reporting and VAT compliance. A mistake in any one area can create a ripple effect that multiplies in impact as you move downstream toward VAT compliance. For example, maybe your procurement team has all the required data but VAT registration numbers aren’t logged, or an incorrect address is used or the wrong entity name is used? Another scenario is whether you know if customs duty has been paid or not in different countries - because the VAT answer may change.
If you miss capturing the correct information you could jeopardise your compliance position. Any inaccuracy picked up down the line, whether by your internal teams or in the worst-case scenario, the tax authorities, creates a need to unravel complex data trails. These inaccuracies can have a significant negative impact on finance, sales and logistics.
5. Consider whether your existing systems, especially your ERP, are sufficiently helpful.
Can your ERP system ensure you are VAT audit ready? Do they keep up with the constant regulatory change? In the vast majority of cases, ERP systems do not have all the information you need. This means you’ll need to find workarounds to get the right data out of the system and there could be data gaps or double reporting with multiple data sources involved. However, tax authorities don’t care about this - having inadequate systems is not an excuse for non-compliance.
How can Vertex help you with your VAT compliance?
Vertex VAT Compliance is an end-to-end, Global VAT Compliance solution that creates an audit ready, source of truth for your VAT return preparation and reporting, organisation wide. Let Vertex VAT Compliance track changes in VAT legislation, regulation, and VAT reporting obligations - so you’re always up-to-date.
You can analyse and understand trends in your data - patterns of adjustments and discrepancies - before filing a return. Knowledge is power and Vertex VAT Compliance and supplementary Vertex VAT Compliance Services help you pinpoint and illustrate potential issues and their impact - so you can work with internal teams to rectify, one-off, repetitive, or deep-rooted problems.
Stop wasting your tax team’s time on mundane, repetitive tasks and use Vertex VAT Compliance to automate data manipulation as far as possible. Reducing the opportunities for and instances of errors associated with a manual approach and allowing your people to move on to strategic tasks. You’ll also improve your knowledge and insights with one central source of truth rather than data pockets held by individuals.
Vertex VAT Compliance will help you create a world standard, audit compliant process across your organisation - including all EU countries/member states and the rest of Europe.
Vertex VAT Compliance adds value to your business by enabling you to:
- Standardise and automate processes and data workflows - ERP agnostic technology means you can ingest data from multiple sources, create one source of truth for VAT and produce your VAT returns in a friction-free process that is right the first time.
- Approach VAT processes holistically with a fully integrated solution, create a robust and scalable foundation for multi-country VAT operations - you’ll adhere to each country’s specific VAT obligations including nuances due to language differences.
- Enjoy an intelligent and transparent view of your business transactions - tracking and visualising workflow progress, combined with automated data validation. Together this functionality helps reduce audit risk, improve audit performance and provide rich management insight for better decision making.
Please remember that Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.