How seriously do organisations take VAT?

Tax authorities in Europe

More countries across Europe are introducing robust regulations to tackle non-compliance with tax/VAT law. Here are some recent examples:

In recent years, the UK authorities have sought to challenge and influence the behaviour of UK taxpayers via a number of measures, including:

  • Behaviour-based penalty regime (penalties based on the extent to which ‘reasonable care’ has been taken by a business in its tax accounting)
  • Senior Accounting Officer regime (larger businesses must confirm that they have appropriate tax accounting arrangements)
  • Publishing tax strategy (a requirement for larger businesses)
  • Corporate Criminal Offences (failure to prevent the facilitation of tax evasion).

The introduction on 1 July 2017 of the Immediate Supply of Information (SII) system which changed the VAT accounting system that had been in place in Spain for 30 years such that large tax payers (over €6 million annual turnover) submitting monthly VAT returns, companies in VAT groups and companies on the monthly refund scheme now provide the tax authorities with real time information on invoices issued and received.

New tax law introduced in Italy last year included:

  • New penalties for errors made in relation to the application of the VAT reverse charge mechanism
  • Extending the statute of limitations for VAT assessments from four to five years.
VAT complexity

…of European businesses surveyed found VAT a particularly complex tax area.

Presence of VAT in strategic/boardroom thinking.

  • VAT is generally overlooked at a strategic level with around 45% of respondents saying it is ‘rarely/never’ considered
  • VAT compliance does not feature at the top table SMEs. Around 55% of SME respondents said it was ‘rarely/never’ considered at a strategic level.

As might be expected, large companies appear more likely to consider VAT implications alongside strategic decisions; however, small companies should arguably also be following the same behaviour given the potential impact of VAT errors that arise may be significant in relative terms for them.

Do companies have a formal VAT/tax strategy in existence?

Few businesses across Europe have a formal tax strategy. In the UK, it will be mandatory for businesses with annual tunrover over £200million to publish their VAT strategy later this year.

  • 72% of respondents said their organisation has no VAT strategy, including even within their wider tax strategy. This is highest in Denmark (90%), followed by Switzerland (85%) and Germany (74%)
  • Italy is the most likely to have a strategy in place, but at 38% even that is a low number. Following Italy are Spain (23%) and the UK (24%)
  • Even among large organisations, only just over a third (34%) has a formal VAT strategy and just over half (52%) have no formal strategy.
  • Given the lack of a formal VAT strategy in large organisations, it is perhaps not surprising that 79% of SMEs lack a formal strategy.
Early consideration of VAT in any new venture/product/transaction?

  • It is encouraging that most organisations consider VAT in the early stages of a venture/product or transaction. About a third (34%) say it is ‘usually’ considered while just under a quarter (23%) say is it ‘always’ considered
  • Whilst UK businesses regularly face complex VAT positions, they appear less likely than European businesses to consider VAT at an early stage in any new venture/product/transaction
  • In comparison 35% of Swiss respondents, with their relatively straight forward tax regime, said that they face no particular VAT complexity but are more likely to consider VAT at an early stage of new venture/product/tranaction
  • Large organisations appear proactive, with around a fifth (21%) saying they ‘always’ consider VAT early on in a new venture/product or transaction and a further 44% saying they ‘usually’ consider it
  • It is encouraging to see SMEs saying that they consider VAT early in a new venture/product/transaction – 33% say they ‘usually’ do and just under a quarter (24%) saying they ‘always’ do.

“Stopping commercial teams signing contracts without thought to the VAT consequences”

 – Group Tax Manager, UK FTSE 100 business

VAT return process: automated or manual?

  • There appears to be a general lack of investment in VAT process automation across Europe. With the rise of real-time reporting across territories we may see a rise in VAT process automation across businesses in due course. Real-time reporting of tax authorities has already been implemented in Spain and Poland and is being considered in the UK as part of HMRC’s Making Tax Digital agenda
  • The majority of organisations (60%) rely on a combination of manual and automated processes for VAT returns. Denmark (at 37%) uses automated systems more than any other. Even among large organisations 59% rely on both manual and automated VAT processes and only 10% rely on automated processes – whereas 29% prefer manual processes
  • A high percentage of smaller businesses are able to rely on automated processes perhaps as a result of their lack of complexity. However, larger businesses are less likely to achieve full automation due to business complexity and additional adjustments are required
  • Increased automation should in theory decrease the risk of VAT errors arising and should assist in identifying unusual transactions at an early stage (ie because these will not fit the parameters of the system).
Are VAT accounting automated/systems driven or reliant on individual decision-making?

How often do organisations seek external VAT advice?

  • Regular VAT advice tends to be sought consistently across Europe with the exception of Switzerland where the VAT system appears to be less complex
  • We have seen businesses not giving VAT matters the attention it arguably requires as regards strategic thinking and resources – it could be that companies are taking external advice in order to rectify VAT errors made rather than VAT planning
  • The proactive approach taken by the Italian tax authority appears to be driving Italian businesses to seek external VAT advice more often than in other countries.