VAT Compliance: From Burden to Opportunity

Collecting business transaction data to fulfil regulatory requirements, particularly around VAT and sales tax, can be an exacting, resource-sapping process. At first look, there does not appear to be a great deal of benefit to an organisation doing this beyond simple compliance. But on closer inspection, by requiring accessible and real-time data, tax authorities have equipped them with a powerful tool.

While businesses operating within the European single market have to align with some complex VAT and tax rules to be able to operate effectively and compliantly across borders, the European Commission has in recent years introduced policies designed to simplify the process, including the “One-Stop-Shop” VAT regime aimed at overcoming barriers to cross-border business-to-consumer selling.

Real-Time Data Collection

Increasingly, tax authorities in Europe use VAT not only as an income-generating tax but also as a tool to collect complex transactional business data. This push for more “real-time” taxation reporting enables the relevant national and supra-national authorities to carry out regular diagnostic checks on the state of their economies while protecting and promoting their respective economic advantages. This type of transactional data collection also enables the large-scale aggregation of relevant economic data to bridge European Union (EU) countries with their counterparts outside the trading bloc.

Leveraging Data for Your Benefit

It’s worth understanding that organisations that think strategically can use the reporting requirement imposed by these VAT regimes to their advantage. While companies need to create an infrastructure to pass on relevant, accessible transaction data as part of their VAT returns, they can then leverage this information for their own commercial advantage. This is because access to real-time transaction data can be of great benefit to a business in a number of ways:

• It can create meaningful efficiencies in the types of administrative tasks carried out by a range of business roles beyond tax reporting, including finance, compliance, operations management, client data, and logistics.
• Data leveraged from this process can also be a great analytical tool to help inform strategic decision-making over both the short and medium terms. For example, an understanding of the average size, timing, and type of orders can prove to be a strong advantage when allocating budgets and forecasting demand. The strategic benefit gleaned from this transaction data can also extend to businesses that wish to conduct gap analysis that is backed by reliable data.
• Recording and using of this data effectively ensures that your organisation gains clarity on tax that has already been paid, while ensuring that the organisation can effectively stand up to external scrutiny if required.

Practical Steps

To successfully harness the data generated from the regulatory requirements surrounding both domestic and cross-border VAT collection, there are a number of practical steps that businesses can take to turn their compliance operation into a proactive, strategic asset.

Organisations need to create the conditions for building optimal tax performance and continuous improvement by transforming their tax function into a “best practices” environment. An effective way to approach this transformation is via the application of an “Assess, Advise, and Transform” methodology. This incorporates four key elements.

1. The first, a transaction analysis, is a means of understanding how people, processes, and systems produce the outcomes for which they are currently responsible to identify gaps and pain points that have a detrimental economic impact.
2. This is followed by the process assessment, where the root cause, or causes, of these transaction gaps are uncovered. As part of this discovery stage, it can also be instructive to carry out a thorough assessment of the tools and technologies that underpin the business’s current approach.
3. Once these points are identified, it is important to outline a business case for change that comprises:
   • An accounting of the costs of current gaps and errant transactions;
   • Documenting both the economic benefits and the return on investment that would emerge from the closing of these gaps; and
   • A roadmap for better performance and improved efficiencies.
4. Once the case for change is agreed internally, your organisation can then put in place a transformation initiative designed to enhance the reliability, accuracy, and overall performance of your tax function. This transformation process should draw on all the findings from the analysis and assessment work and properly align your people, processes, data, and systems with your business’s strategic goals.

An Opportunity to Seize

While tax authorities across Europe are making efforts towards streamlining the process of VAT collection, these compliance requirements can still result in unnecessary pain points for businesses unable or unwilling to improve their tax functions.

From the tax authorities’ perspective, effectively leveraging the data from VAT submissions ensures business taxes are fair, efficient, and growth-friendly, while reducing the scope for competitive distortions. From the business’s point of view, retaining and making strong use of VAT transaction data provides clarity on taxes paid, prevents tax evasion, avoidance, and penalties, and protects against the likelihood of fraud.

When collected properly, this data can also equip a company with the means to create a wide range of operational and administrative efficiencies. It can also provide the means to unlock meaningful insights that can be instrumental in informing longer-term strategic decision-making.

Businesses that understand the value in effectively collecting and transmitting their transaction data to the relevant tax authorities can take advantage of the ability to access such data in real-time. Ultimately, an organisation’s strong tax performance and its ability to use relevant transaction data to further its strategic goals are inextricably linked.

Ryan Author: 

Ben Knock
Managing Director, Vice President
VAT Compliance, Consulting, and Reclaim