The digitisation of tax is taking different forms in different countries. From Standard Audit Files for Tax, used by several countries in Europe, through to Chinese ‘fapiao’ invoices, each country has developed its own methods with varying degrees of sophistication.
In the UK, the Making Tax Digital for VAT programme was introduced in 2019 and has since brought about significant changes to the country’s VAT compliance processes. Businesses are now required to keep digital tax records and connect their ERP systems to HMRC’s systems via an application programming interface.
As the methods in which tax data is collected and exchanged between businesses and tax authorities develop around the world, the road to real-time, or near real-time, audits of full transactional data looks ever closer. So how can businesses best prepare themselves for this auditing revolution?
To ensure ongoing VAT compliance, and in preparation for real-time audits, it’s crucial that organisations have access to quality data, processes, and technologies.
First, businesses should take a holistic view of their VAT compliance processes. Where does the data originate from and is it accurate, comprehensive and traceable? Which systems are used? How is this information validated and consolidated? And is there a full record of all underlying information and documents? In other words: is the entire audit trail watertight?
The base data is key here – it must be accurate and extensive. In fact, the data stored should be larger than that which you need to report to the authorities today, to future-proof the reporting and auditing processes. Storing a larger data set will provide more granular data should tax authorities need to drill down into the information further, such as to determine the intra-community acquisition of goods in an EU member state from a particular supplier within a certain timeframe.
For organisations trading across multiple tax jurisdictions, ensuring that information is correctly reported according to the tax authority’s requirements can be a challenge. For example, the UK’s current VAT return requires taxpayers to fill in nine boxes of information, while a taxpayer in Italy has over 500 different boxes to complete. Numerous tax authorities, including Spain’s, are now asking for transaction-based reports with the reporting of all transactions, whereas other countries, such as the Czech Republic, are only requesting certain transactions be reported. Knowing the differences in each jurisdiction and having the required data instantly available for reporting and auditing purposes is crucial.
It is also important that the reported transactional data is fully in sync with the data posted in different ERP systems, and with the data reported in the aggregate VAT return. For instance, within an ERP system, the accounting and reporting periods aren’t necessarily aligned, making reconciling dates a must. In addition, any corrections in the ERP system must be reflected in the reporting systems – credit notes, corrected invoices and internal reversals mustn’t be forgotten, with all corrections linked with the underlying transactions.
And of course, when looking at the underlying accounting software systems, organisations need to be able to automatically aggregate the data from all its different source systems for VAT reporting. Typically, this means bringing together data from across ERP and finance systems, but data from non-finance systems, such as logistics systems, may also need to be combined with the financial data to complete the filing. Organisations that fail to automate the aggregation of data across multiple systems create significant unnecessary complexities for their tax teams.
Ultimately, the end-to-end flow of information for VAT compliance purposes must become digital, and as automated as possible. This requires the creation of a digital trail in which submitted information can be drilled into to reveal the underlying information, documents and eventual adjustments. All embedded document repository stores must also contain version-controlled documents, with workflows clarifying each person’s responsibilities and actions.
Whether to invest in smart tax technologies to automate and centralise the VAT compliance process is an important consideration. The most sophisticated ‘tax engines’, for example, cut manual work, reduce errors, provide reconciliation functionality, improve accuracy and can significantly enhance compliance input, but they do not facilitate VAT reporting itself.
Importantly, tax engines remove the complexities of dealing with tax calculation within multiple tax jurisdictions. As the global tax content within the tax engine is updated constantly and automatically, an accurate tax calculation is a basic requirement to drive quality data input into indirect tax reporting systems, ultimately delivering audit readiness to better support the business for VAT compliance.
Real-time audits based on transaction-driven, real-time reporting will happen sooner rather than later across the globe. The earlier organisations prepare and lay the groundwork, the better. As part of this, they must consider investing in technologies that capture large amounts of data and automate the full VAT compliance process across borders. Only by having quality data, processes, and technologies in place, will companies have any chance of keeping pace with change, while futureproofing themselves for when real-time audits become a reality.
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