Let’s face it, the only reason any of us produce a VAT report is because we have a legal obligation to do so. It’s certainly not for our own entertainment!
As with any legal requirement, getting your VAT reports right has always been important. But in recent years, tax has been subject to a digital revolution that has catapulted data to the very top of every tax professional’s list of priorities.
The digital revolution
In recent years we’ve seen a huge trend of tax authorities around the world turning to digitalisation to obtain more complete, accurate and reliable data from taxpayers with the ultimate aims of reducing the VAT gap and preventing VAT fraud.
A large proportion of VAT data is now collected through systems like e-invoicing, SAF-T and real-time reporting, which has put tax authorities in a position to check every line in every tax return for every taxpayer. Some processes have been replaced by machines that process collected data on an industrial scale.
Just as the quantity of tax data hits an all-time high, the expectation for quality has already started to be considered and enforced.
The importance of data quality
I often speak of ‘garbage in, garbage out’ – a concept more commonly used in computer science than tax, but one that refers to the quality of the output being determined by the quality of the input. In simple terms, you cannot report what you don’t have!
For example, consider these two transactions. Both relate to invoices for the same amount and both produce a result for the same amount of tax owed, but the tax code applied differs and therefore the calculation in the first line is incorrect.
These two can be used as examples of what ‘garbage in, garbage out’ means for tax purposes and its consequences in VAT: if the input is not correct the output will not be correct either and, consequently, we would incorrectly be reporting a transaction subject to the standard rate when it should be reduced rate.
If a tax authority was to validate the tax rate used during an e-invoice upload or any extract of your raw data, a simple check would identify that incorrect data. That is a red flag that could lead to a time-consuming and resource-heavy VAT audit.
What about data beyond rates?
When we talk about tax data, it’s natural to assume this is related to the VAT amounts charged. But not everything is about numbers.
VAT data also includes information that tells you so much about VAT status of any taxable person and its obligations. In fact, many countries use tax reports to get an accurate and timely economic picture.
For example, the treatment of goods and services for VAT can help to determine what tax rate needs to be charged for intra-community transactions and, at the same time, the difference between goods and services is also essential to allow a reconciliation to the EU Intrastat reporting that tracks the movement of goods.
Triangulation transactions of goods receive a zero-rated tax treatment but they have to be reported separately from the reconciliation to the Intrastat report.
Another example is related to the VAT registration status that is linked to customers and suppliers and is also essential to determine whether a zero intra-community sale of goods VAT rate can be applied. Each taxpayer is assigned a VAT identification number that should be recorded in your master data, like your customer, which is also proof that the entity is VAT-registered and can charge and recover VAT.
With the introduction of e-invoicing in several countries (even outside the EU), it’s becoming more important to ensure that the correct VAT registration number is recorded against the taxable person as this is often used by the tax authority to identify them and their customers in order to allow the recovery of the VAT charged.
The tax date is the date that VAT should be reported by which becomes relevant when receiving advanced payments. It is also used as the date when VAT can be recovered, which in the UAE is the date the invoice is stamped. How does your ERP capture the date an invoice is physically stamped?
Some tax authorities require the data to be classified in almost forensic detail for purposes such as recording the VAT associated to credit notes in a given period (e.g. Portugal) or even VAT on sales to a specific region (e.g. Livigno in Italy).
What are the minimum standards expected of your business?
When it comes to capturing data and utilising it for VAT reporting, there are minimum standards you must meet in the digital age. The specific details will vary depending on the regulations imposed by each tax authority, but a number of basic elements must be covered across the world.
Firstly, consider compliance versus reconciliation. Most tax departments only focus on the data needed for the VAT return but there is a big difference between storing data to satisfy the demands of compliance and the requirement to be able to reconcile and prove that data IS compliant.
To get the most out of the tax data and to be 100% confident that the data in the VAT return is correct, the tax data collected must help to reconcile that the correct VAT has been charged.
Secondly, make sure you capture the tax details at the point the tax was determined.
For example, let’s say you only have one EU ZERO tax code but you sell both goods and services. If the items that you sell are classified as either goods or services then you could argue that you only need one EU ZERO tax code and, during reporting, you could simply take the Product Type classification from the item being sold.
The problem with this is that any number of reasons could cause the tax treatment to change at the time the invoice is created. If a user who is creating the invoice notices that the item being sold was not in fact a service but a good then they could change the tax treatment on the invoice itself, leaving you with errors in your reports.
Data graveyards: What will come back to haunt you?
Tax authorities obtain vast, unimaginable amounts of data. While that data is never deleted, much of it is also never utilised. Until now.
There have been cases of tax authorities all over the world showing more interest in historic records with a view to identifying and punishing offences from previous years.
And all it takes is a new algorithm to run against historic data and the VAT return you thought was dead and buried in the data graveyard will automatically rise and become a new problem. So watch out for data zombies!
In the meantime, ensuring your data is as clean, complete and accurate as possible is the only way to protect you and your business from the zombies of the future.
What’s the solution?
Data isn’t disappearing. There will only be more of it, collected more frequently and analysed in greater detail.
I’d advise tax professionals to make sure their processes are strong enough to allow them to capture, utilise and record data in a way that will stand up to ever-growing scrutiny in the digital age.
At Innovate, we believe the answer lies in automation. Automation should be applied wherever possible within VAT processes, although your ERP or accounting system will dictate exactly what is possible.
Perhaps the main reason to automate tax is the extra level of detail it brings. Not only will an automated solution reduce the number of errors in your data, it will also identify and highlight errors you did not even know you had.
There are many more factors that help to build the case for automation. Contact us today if you’d like to find out more and understand how tax technology could transform your business.