Indirect taxes can be the most difficult thing to calculate and file correctly the first time — particularly when combined with HMRC’s Making Tax Digital (MTD) regulations for digital record keeping and reporting. Although the MTD initiative aims to simplify VAT across the EU, it has led to additional confusion over tax rates and payment obligations, as well as different specific requirements of individual EU countries. Determining when and how much to collect taxes and when and how to report those taxes can be challenging. Understanding the basics of VAT investigation and compliance can help businesses avoid common VAT errors and other mistakes – not to mention avoid unnecessary audits or penalties.
The basics of sales tax compliance
Like sales and use taxes, value added taxes (VAT) are an example of what some call an indirect tax — that is, a tax collected by the seller, who invoices the buyer for the tax at the time of purchase and then pays or remits the tax to the government on the buyer’s behalf.
VAT activities are typically divided into three areas: capture, validation and reporting, each affected by digitalization:
- Record: Initial transaction data is captured at the recording stage but is not yet recorded by the tax department at this point.
- Confirm: The validation phase ensures that only tax-compliant data is included in the tax return. Once this is completed, a final report will be submitted to the tax department.
- Report: Due to increasingly tight time frames, companies need support from tax technology during the reporting phase. This is where automation becomes critical for certain tasks, such as ERP mapping of tax codes to accounts payable and accounts receivable documents and real-time reporting.
For example, the current VAT rate for most purchases in the UK is 20%, but certain products, including energy saving measures and child car seats, are charged a reduced rate of 5%. Other exceptions include a zero rate on most food, books, newspapers and children’s clothing. Although VAT is not charged, sales of zero-rated goods and services must still be recorded and reported on a company’s VAT return. Some transactions exempt from VAT include stamps, financial and real estate transactions.
With VAT, the seller is responsible for collecting the tax and remitting it to the relevant tax authority. As part of the MTD regulations, reporting, records and communication with tax authorities must be digitized.
Frequently made mistakes
The most common mistake businesses make when determining and complying with VAT is a reluctance, particularly among smaller businesses, to change their existing, familiar approaches and outdated technologies. This may be due to systems not automatically keeping up with frequently evolving regulations, a lack of tax expertise, or concerns about the costs and effort involved in moving to a digital model.
Another common mistake is poor record keeping and lack of an audit trail (e.g. missing receipts and other defensible data). This is one of the problems that MTD aims to alleviate. Especially in the transition phase, there will be companies that will be penalized for a lack of consistent and transparent accounting.
If you are a company that does business in multiple countries, you know how difficult it can be to stay up to date on each country’s tax regulations. This is another area where not keeping up to date with changes in tax laws and regulations, particularly global tax laws, can cause problems.
Keep records and stay informed
Record keeping is one of the most important aspects of MTD compliance – and mistakes can result in costly penalties. All accounts payable and debtor data must be stored in electronic form, ideally using functionally compatible technology — in other words, technology that can store records, carry out the necessary calculations and submit the information directly to HMRC via their API.
If there’s one thing that’s certain about UK tax law, it’s that it won’t stay the same for long. So how can a business stay up to date with the latest developments in VAT regulations? One option is for HMRC to provide regularly updated information at www.gov.uk/guidance/help-and-support-for-vat, including email updates, videos, webinars and more, to help you navigate to help with the changes to VAT and MTD reporting.
Let the software do the hard work of meeting your sales tax investigation and compliance needs
Although many small businesses have opted for a stopgap solution to meet their reporting needs, this can never be more than a temporary solution. As well as meeting all the requirements of HMRC’s MTD initiative, a comprehensive software platform can save time and money in the longer term whilst making VAT reporting error-proof. A solution like Thomson-Reuters’ cloud-native ONESOURCE software suite can automate your determination and compliance, eliminating some of the most complicated and tedious parts of the MTD process.
When choosing a comprehensive global solution for efficiently and consistently calculating and recording your indirect tax liability, including determining VAT determination, you must determine the size and scope of the software you need for the size and scope of your VAT activities. These solutions enable business-critical tax determination and calculation for all transactions, leveraging up-to-date tax content for the highest level of accuracy — from transaction to transfer.
Additionally, for global businesses, a platform like that offered by ONESOURCE Solutions can also help automate compliance reporting of not only VAT, but also GST and other international tax returns and statutory duties.
Summary
Although determining, calculating and reporting VAT may seem complex, there are a number of simple steps you can follow to avoid misreporting and the penalties that may come with it. With a robust, comprehensive tax platform that automates most of the process, companies can manage their indirect tax affairs more easily and without the stress associated with manual reporting.
