Indirect tax, or VAT, was previously sometimes perceived as a sunk cost for businesses, but this perception is changing rapidly. As a result, it’s now vital that VAT is awarded the status it deserves.
If businesses are to report more accurately, thereby avoiding costly investigations or penalties, VAT needs to be more closely monitored and managed. But it also needs to be brought under control to ensure that any fluctuations in today’s tax regime can be managed appropriately – thus ensuring filings, claims, correct payments and other obligations continue to be met.
VAT is a major tax contributor in the UK, second only to income tax. During 2018-19, it generated £135.6bn in revenue for the Treasury, up 5.4% compared to the previous year. However, HMRC estimates that £12.5bn in VAT is still missed annually, and it’s this tax gap that the Making Tax Digital (MTD) initiative has sought to address. In addition, we’re now seeing VAT used as an economic lever to help deal with the shock waves of the coronavirus, leading to changes in the rate (as with the temporary VAT cut in the hospitality and entertainment industries).
A year on, and MTD has already generated over £223m in extra tax revenue – that’s almost £30m more than its target of £195m. And with this figure expected to double in the next 12 months, HMRC seems to be on track to meet its goal of £480m in extra revenue by year end 2020-21.
The ‘digital links’ part of MTD seeks to make reporting more accurate by enabling HMRC to scrutinise Returns more closely should they choose to. This has increased pressure on businesses to get their Returns right first time. It’s no longer sufficient to think the Return is ‘good enough’ – once digital links are implemented in April 2021, HMRC will have greater visibility into Returns than ever before.
We’re also seeing pressure exerted by the COVID-19 crisis. The economic ramifications of Lockdown mean that businesses now have to monitor their bottom lines closer than ever before to protect cashflows. They simply can’t afford to under-claim or over-claim, with the latter resulting in them potentially having to pay VAT back, with interest and penalties on top.
Fit for purpose
The problem now is that businesses are discovering they have a business-critical process that is not housed within their business architecture, nor served by a business-critical application. Unlike other similar processes that might reside in the ERP system, for example, VAT is often outside the fold. It’s typically performed inhouse, with data exported from these systems and manually manipulated in spreadsheets, which, while versatile, isn’t sufficiently resilient.
VAT needs a dedicated compliance solution – one that not only records VAT, but also enables the business to…
- Keep track and monitor its liabilities so that it can budget accordingly. The COVID-19 crisis will continue to disrupt how businesses manage VAT. Businesses have been able to take advantage of measures such as delaying VAT payments between March and June 2020, but will need to schedule these payments in the future. In addition, it’s believed that the standard UK VAT rate might be cut in the near future. Businesses must therefore be able to respond quickly to such changes.
- Perform data cleansing to ensure accuracy. One way of improving accuracy is by looking for anomalies within both source data (digital records) and calculations so that reporting accuracy can be improved and the likelihood of HMRC queries reduced. Data cleansing can also help with the slicing and dicing of data, helping to identify different VAT rates and any transactions that should be excluded from the Return.
- Analyse data to facilitate strategic planning and forecasting. Comparing the Return in progress with those previously submitted, alongside period-on-period payments, can help to highlight potential errors and inconsistencies. Such trend analysis also supports more accurate forecasting of future liabilities, which aids commercial planning and enablement.
Unlike generic applications such as spreadsheets, a VAT compliance platform integrates with existing systems and processes to become part of the IT architecture. This ensures a smooth flow of data from source systems, such as accountancy and ERP solutions, through to the Return, which helps create the digital audit trail necessary under Phase 2 of MTD. (See our ‘Proving compliance’ blog).
In its evaluation of MTD, HMRC found that businesses which used a fully integrated software package were able to “manage their finances in real-time” and found it “easier to spot and correct mistakes at source” with many benefitting from “intuitive and easy-to-use dashboards”. This contrasted markedly with those using spreadsheets who found “the transition (to MTD) more difficult”.
Benefits experienced by those using dedicated software included:
- Reduced input errors due to data being automatically pulled into the software, meaning less likelihood of missed, out of period or duplicate entries.
- More accurate returns due to less dependency on error prone, spreadsheet-driven processes.
- Reduced miscalculations, with figures calculated automatically by the software
- Error correction due to frequent input, automatic bank reconciliation and the use of fully integrated software
HMRC is hoping that “over time, these businesses may feel able to move to other software solutions which, as well as further driving down scope for error, will enable them to experience the wider benefits of MTD”, therefore implying that dedicated compliance software is both necessary and beneficial in the longer term.
Able to offer the assurances necessary to support VAT as a business-critical process, AlphaVAT, our compliance platform, is a robust solution that integrates with your existing financial systems. To see a demo of how AlphaVAT’s innovative data cleansing and analytics features can help you navigate the changing VAT landscape, contact us today.