Kid Misso highlights 5 failures in current VAT returns processes; how new global digital reporting mandates will expose these; and what he’s doing about it
Many businesses have coped manually with 5 core failures in their existing International VAT returns reporting processes. They have depended on the 2-4 weeks returns submission deadline to manually check and correct as many errors as they do detect – with many others (with financial liabilities) escaping them.
But this ‘luxury’ is over with the global rollout of real-time digital reporting and e-invoicing mandates. This means governments will already have transaction data (including counter-party versions) to check against returns – so these post-transaction corrections will trigger questions and audits.
In this blog, I will cover: the 5 returns process failures; the impact on the traditional process of VAT returns; and how we at VATCalc can arm you today to tackle the new reporting reporting paradigm. This includes the launch of our latest full-legislative VAT returns product, VAT Filer, Uniquely, this is built on the same application as our global tax engine, VAT Calculator, for live transaction determination and auditing prior to filing or e-invoice submission.
If you would like to join our latest beta trial of Filer, contact me.
5 failures on existing VAT returns processes
As any company with multiple VAT registrations will know, modern VAT compliance is extremely challenging and it is only getting harder. The five most common reasons for this are:
1. VAT data quality is poor. This is because many upstream billing systems have unreliable or basic VAT determination capabilities. Additionally, purchase invoices are usually tax coded manually in accounts payable by staff who don’t understand VAT or they flow directly in as e-invoices from vendors with no proper coding.
2. Country requirements vary greatly. Since every country has a different rules, different return process, with different forms, different electronic submission formats and methods as well as everything being in different languages it is difficult for companies to standardise their processes and apply best practices.
3. Compliance is going digital around the world. It is no longer possible to manage without technology support in many jurisdictions because at the very least the end submission is in structured machine-readable formats like XML and JSON and often data is required to be submitted via APIs.
4. Compliance is becoming more transactional and moving to real-time. Tax authorities increasingly want to see all a company’s transactions rather than summaries of returns and the frequency of submission is compressing considerably with immediate filings and e-invoicing regimes become more common so there just isn’t time to correct poor data before it gets to the tax authorities.
5. VAT Compliance tools aren’t automated enough. Even companies that have invested in VAT compliance automation software have found that early generation software has too many steps for users that often aren’t orchestrated properly within the software and are too difficult to use.
The impact on the traditional compliance process
The five challenges listed above are putting serious pressure on the traditional compliance process and more and more companies have found that they do not have the resources or tooling to maintain confidence in the accuracy of their compliance and that this sequential waterfall model is not fit for modern real-time transactional compliance.
The diagrams below compare the traditional approach with the needs of the future compliance process:
The traditional process is batch in nature, very specific to just filing returns and usually done periodically whereas the compliance process of the future also considers invoicing and digital reporting as well as being real-time and transactional.
In-house or outsource?
Many companies that have looked to outsourcing in the past have found that, although it can help a great deal to have country expert resources working on their compliance, the need to have to have real-time or near real time transactional links with their outsourced provider to comply with many of the newer country requirements means they have the same type of data integration projects that would be needed to implement software solution to support in-house compliance, which will likely have a lower total cost of ownership over time.
Solving the future compliance challenge
Each of these five challenges can be addressed with dedicated technology by forward looking companies that are prepared to take control of their processes, systems and data. VATCalc has built a unique end to end application to help companies on this journey and we help them address the five challenges in the following ways:
Problem 1 – VAT data quality is poor
Solution: The best way to address this problem is to have a dedicated VAT determination solution integrated into your upstream systems for both sales and purchasing that always gets the VAT right on every transaction.
VATCalc’s leading edge VAT Calculator is fully legislation based so it covers all the complex tax requirements without the need for customers to add and manage lots of custom rules and it is a modern cloud-based platform that uses modern RESTFul APIs so it is easy and quick to integrate with.
In addition, as well as determining the proper VAT, invoice messaging and tax codes, all transaction determination also includes a determination of how the transaction should be reported. This means that transactions saved to the VATCalc data pipeline are instantly ready to be reported in an e-invoice, a VAT return or digital submission.
If integrating a real-time VAT determination solution is not possible then VATCalc’s customers can use our VAT Auditor capability to automatically upload batches of data on a high frequency basis to VAT Filer, which also uses the full determination capability of VAT Calculator to run each transaction against the full tax engine legislation. This quickly identifies where transactions have been inaccurately taxed in upstream systems. Not only does this get the subsequent reporting (e-invoicing, returns and digital reporting) right but it allows companies to start to improve their upstream master data and determination logic.
Problem 2 – Country requirements vary greatly
Solution The best way to address this problem is to generalise compliance so that differing returns and processes can be handled in a common way in a common language without losing the required unique needs of each country. VATCalc has built a unique approach to this that allows all types of reports to be shown in a common user experience where all returns can be worked on in the same way but they are all instantly recognisable to an expert in a given country.
Not only can this be done through our user experience in a browser but companies that have invested in tax data warehouses or even ERP companies, looking to offer their customers more country capability for compliance, can call our VAT Filer service programmatically and have returns and submissions generated and sent automatically in the background.
Problem 3 – Compliance is going digital around the world
Solution: VATCalc is based on leading edge cloud technology that is designed around loosely coupled microservices that interact with one another through APIs. This approach is perfectly suited to connecting our services to tax authorities. We can use APIs to quickly connect to any service that we need to comply with tax authority requirements or to improve automation with capabilities such as VAT number validation, currency conversion, digital submission and e-invoicing.
Problem 4 – Compliance is becoming more transactional and moving to real-time
Solution: The future of compliance requires:
- Being confident that a sales transaction is properly taxed and as the right attributes to be electronically acceptable to both your customer and the tax authority,
- Being able to receive, validate and automatically post purchase transactions and
- Having confidence that your ledgers accurately represent the data that the tax authorities have about you.
These things all need to happen synchronously with the business activity that is being taxed since the tax authority will know about the activity and the corresponding tax immediately (through digital reporting or e-invoicing). This means that there is no opportunity to tidy up and adjust VAT later before you file.
VATCalc is designed around the concept of Continuous Compliance. This is the idea that the determination, validation, enrichment for VAT, digital reporting, e-invoicing and returns are all happening continuously in real-time to support automatic billing or posting events. This means that every invoice:
- Has accurate tax;
- Has the proper VAT related data on it;
- Will always reconcile with a company’s ledgers and the tax authority; and
- Is created with consideration for how it will be reported (so that the company is return ready at all times).
Problem 5 – VAT Compliance tools aren’t automated enough
Solution: Most legacy VAT reporting tools are very complicated tools that have been built to support the traditional tax compliance process and are not ready for the next wave of digital VAT. Additionally, they are typically tools designed to be operated by expert users with many features to perform all the numerous tasks that traditional compliance operations evolved to perform over time.
Put simply, they are overcomplicated, very hard to use properly, difficult to maintain and extend and unsuitable for the compliance operation of the future.
VATCalc has completely re-imagined what VAT compliance needs to look like for our customer to massively simplify the user experiences and to automate many of the complex user processes in the background so that our users don’t have to think about the problem at all.
For example, we ingest our compliance data through our VAT Calculator service, in real-time or in batch through VAT Auditor, so we have confidence in the accuracy of the transactions and do not need complicated and hard to use exception reports or errors & warning functionality. The users just focus on preparing returns with high quality data.
This relentless focus on simplicity is particularly difficult in the tax domain since VAT is very complicated and only by building sophisticated software that is powered by first class tax legislation content can the complexity be taken out of the user experience. VATCalc was founded on this principle.
If you would like an informal conversation about these issues, or just talk generally about tax automation, feel free to contact me for an informal and even a peek at some of the tech I’ve talked about above.