VAT Compliance is a loaded term, so it’s important to define it before we dive in. For the purpose of this discussion, VAT compliance will refer to 3 primary areas:
- Ensuring your business is VAT registered in all jurisdictions where the legal obligation exists, whether that be a resident VAT registration (i.e. in your home country) or a non-resident VAT registration (when your business trades in a foreign country).
- Once VAT registered, it is crucial that all commercial transactions that are considered taxable in that country are treated correctly from a VAT perspective. This includes issues like charging the correct rate of VAT, including the necessary information on invoices and using relevant exchange rates.
- At the end of every tax period (month, quarter, year etc.) your business will be required to submit various statutory reports. The most obvious is the actual VAT return, where the taxable transactions referred to in Point 2 are declared and the eligible VAT is paid / refunded. In addition to the VAT return, several other declarations may be required, including EC sales lists, intrastat declarations and SAF-T filings.
As the world has moved online, global tax offices are slowly but surely starting to follow. Each of the 3 pillars of VAT Compliance are being monitored digitally and businesses are expected to keep up with the technological and legislative requirements.
Most tax authorities have implemented procedures to stay on top of non-compliant businesses:
- Many have developed bots and other methods to scrape the internet and other relevant sources (including payment platforms, credit card data) to identify transactions being executed in their country by foreign businesses.
- Analysis of customer invoices being received allows the tax office to flag any non-compliance transactions. For example, if a US business sells to a Spanish customer, the customer in Spain will need to report this invoice to the authorities who will use algorithms to ensure those invoices are compliant and penalise the supplier for non-compliance.
- Most relevantly, tax offices are moving towards technology-driven reporting. VAT registered businesses are expected to have the relevant software to ensure VAT returns and other statutory reports are submitted electronically according to very detailed specifications. Failure to comply with these new laws is non-compliant and can result in significant penalties.
It is therefore fundamental that your business is up to date with these technology-driven obligations and have processes in place to comply. The most obvious considerations are listed below:
- Have a process to review all transactions in new jurisdictions or using new supply chains to ensure no new VAT obligations are being missed.
- Access to a resource which keeps your business abreast of all legislative changes and gives detailed guidance on how transactional compliance can be maintained.
- A secure and transparent online platform to share data and communicate with your VAT partners, including fiscal representatives or agents.
- Software that can integrate with your accounting system to import relevant taxable transactions for analysis, compliance checks and VAT reporting.
- Software that complies with local legislation for submitting the relevant statutory reports, whether it be the VAT return (for example UK MTD – Making Tax Digital), real-time reporting (SII reporting in Spain) etc.
- Ideally a payment solution that allows you to settle VAT liabilities securely and globally via a secure platform.
If your current VAT Compliance process does not factor any of these 6 key elements into the equation, then your business is probably at risk in some regard and it is certainly worth doing some due diligence or a benchmarking exercise…