VAT

 

The implementation of digital links will require many businesses to take a good hard look at the way they calculate VAT. They’ll need to critically appraise where the manual processes are, how they will replace these with digital links, and in some cases restructure how they source and subject VAT data to different treatments.

For some, it will be relatively easy to comply using their existing MTD solution but for others that may not be the case. The ease of transition is generally comparable to how complex the VAT process is. Those with multiple trading entities, Partial Exemption or VAT groups will have more data from more sources than, say, a standard trader using a single ERP system and this will make it a more complex undertaking. 

Complex or simple?

A convoluted process means there is more opportunity for error to creep in and there are also more manual processes to consider due to adjustments such as a cycle-to-work scheme. Those with complex VAT environments, such as Partial Exemption Special Method, for example, are more susceptible to risk because of the sheer volume of data being collated and the number of calculations and adjustments being performed. 

For the standard trader, the process can be much simpler. In many instances, we see that their ERP system can simply feed relevant VAT data into a spreadsheet, with little or even no intervention. If they do need to make adjustments, it’s fairly simple for them to digitally link spreadsheet cells to comply.

On the up

But what of those that occupy the middle ground? If your business is growing you’re likely to see your number of multiple trading entities or VAT groups increase and with it your complexity. This can see the standard trader that has happily relied upon spreadsheets become much more exposed to error as they begin to draw data from different sources and their spreadsheets multiply. Manipulating these spreadsheets can then become problematic and it’s at this point the trader could break a digital link and become non-compliant.

Who’s at risk?

It’s therefore highly likely that both large businesses and SMEs experiencing growth will see their risk of non-compliance increase under the digital links mandate. So, what can you do to mitigate this? Let’s look at each in turn.

Low risk

If your VAT process is fairly straightforward and your business is unlikely to experience a reasonable amount of change, you may have to make minimal changes. In this scenario, the existing ERP system together with API-enabled spreadsheet/s and MTD software that can cater for the digital links requirements should be sufficient to meet the compliance requirements.

Medium risk

If you fall into this category it’s worth taking a look at your digitalisation strategy. Chances are you have sought to adopt a “compliance first” rather than “digital first” approach, which prioritises meeting the compliance requirements. There’s nothing wrong with this but the danger is that as the business continues to scale it’s likely to need a more robust approach that sees automation used to alleviate workloads. Having to revisit your strategy can be costly and time consuming so it makes sense to adopt a more long-term approach that systemises the VAT process from the start. This can allow you to exploit the MTD process to gain accuracy and efficiency gains by using tools to detect and correct anomalies and errors, for instance or data analytics capabilities to compare reporting periods and carry out projections.

High risk

Businesses that fall into this category should consider implementing a dedicated VAT compliance platform that can be easily integrated with their existing systems. This will minimise disruption while allowing complex calculations that previously required manual intervention to be automated and digitally linked, resulting in a digital audit trail. Such businesses should also consider a full process review in order to identify how and where they can automate further to truly benefit from MTD. 

Where do you fit?

If you’re wondering whether your business qualifies as low, medium or high risk there’s a simple way to find out. Go to our VAT Readiness Checker and answer the multi-choice questions to find out what steps you need to take to prepare for the digital links mandate to lessen your risk. It’s completely free and takes under a minute to complete.