We hear from Claudio Cassanmagnago, Head of VAT at cost management consultancy, Lowendalmasaï, about the VAT difficulties facing international businesses.
There are a raft of challenges for businesses operating in multiple jurisdictions, including differing VAT rules, changing deadlines and potential language barriers.
Expanding into new territories is priority number one for most companies nowadays. Unfortunately, many companies don’t consider the different timings and procedures required to complete a VAT registration, which in turn can endanger the timely start of sales activities abroad. As well as obtaining the correct VAT registrations, companies must ensure they file the appropriate local VAT returns correctly and on time. It is also important that the VAT situation is constantly monitored as rules are subject to change. Back in January, EU legislation came into force affecting businesses involved with selling digital services. VAT is now charged in the country where products are bought instead of the country where they are sold.
It is not difficult for businesses to fall foul of the rules and we would always encourage companies to seek advice at the earliest possible pragmatic stage. In this way, unnecessary costs, delays and stress will be avoided. Moreover, it ensures that businesses are free to focus on sales and growing their customer base at a critical point in their growth cycle.
There is also a significant reputational risk to consider - companies can find themselves faced with hefty fines and public sanction if they are found guilty of non-compliance with VAT legislation. Indeed, since the financial crisis, governments have often turned to VAT as a way to raise funds to bolster public finances and as a result Treasury departments take a strong stance on the rules. Statistics published by HM Revenue and Customs reveal that VAT is worth more than £100 billion a year to the Government.
Overpaying VAT is another common problem that companies face. Lowendalmasaï research shows that unclaimed European VAT by British companies totals in excess of £13 billion. For example last month it was reported that administrators dealing with the collapse of MG Rover ten years ago are still trying to recover £56m in overpaid tax. According to the IMF, UK companies are paying between two to four billion pounds in unnecessary VAT fines. No business wants to pay more tax than they have to, particularly as it is often the largest cash outflow.
One of the hidden costs to businesses using Shared Service Centres (SSC) can be wrongly posted or incorrectly claimed VAT. When businesses process invoices locally, the accounting function will have a good knowledge of the transactions being processed, and the correct corresponding VAT treatment. However, when these processes are centralised, local knowledge can be lost. This can lead to errors being made in the processing of a company’s transactions into their ERP systems.
Experts can help review the input VAT ledgers of businesses to ensure the correct VAT treatment has been applied and identify potential VAT which need not have been paid. Although companies may look to perform these reviews in-house, due to the scale of the projects, it may not always be feasible. It is not just the identification, but also the additional investigation required to obtain supporting documentation that requires a time commitment. We have recently worked with an IT multi-national and identified over £900k of VAT they hadn’t claimed.