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ERP to VAT Return: why data and tax codes are key to VAT compliance

Without the correct data and tax codes, a successful VAT return is impossible. Period. But so many companies across the globe are getting this wrong. Succesful VAT compliance comes down to data. And not just any data; digital data. To be compliant, your business can no longer rely on paper ledgers or manual bookkeeping. VAT authorities are demanding a granular level of digital detail with every VAT return. And it can only be done when your data is correct upfront. 

The connection between your ERP system and VAT 

Everything that you do in your business needs to be captured into a system. Larger corporations may opt to use ERP systems like SAP and Oracle while smaller companies may choose accounting software like Xero. Some companies even build their own proprietary platforms for their own supply chains needs. 

That ERP system is built to automatically capture all your sales and purchases transactions. It’s the home of your Accounts Payable and Accounts Receivable departments. 

Classifying transactions on your ERP system

All transactions are captured into your ERP system but those transactions need to labelled and classified appropriately. We call these tax codes and transaction types. It’s important that you know what that transaction actually is throughout its journey through an ERP system. 

For example, the very first level of classification would be is this transaction a sale or a purchase. When you use your ERP system to invoice a customer, it will usually automatically be captured as a sale. However, when you receive an invoice (we’re now on the accounts payable side of Finance), these will be captured as a purchase. 

Easy enough? Yes. But when it comes to tax, we’re not even off the starting line yet. Complexities begin.  

Hello Tax Codes: classifying transactions for VAT

For VAT purposes, you will need to know and input a lot more information about the transaction. The buck doesn’t stop at “this is a sale”. You’ll have to know the nature of the sale. For example, Perhaps it’s a local sale, an international sale, a B2B sale? 

The same principles apply to your input VAT on your purchases. You are required to know and capture a more granular level of detail (such as tax codes and transaction types) on your transactions to stay VAT compliant. For example, was this purchase local or a cross-border purchase etc. 

Why does VAT compliance require granular transaction detail? 

Ultimately, when it comes to filing a successful and compliant VAT return, the VAT authorities expect a certain level of detail. For example, if you have a registration in Germany, you’ll know that their VAT return has tens of boxes that group your transactions. It’s your job (and your ERP’s) to be able to know which box those transactions belong to. Do they belong in the local German sales box? The Goods sales box? The services sales box? Without this level of classification, a VAT return is not possible. 

Tax codes: Absolute necessities 

This granular level of detail required means each transaction is assigned the correct tax code. However, these tax codes are seldomly captured correctly or at all when a transaction is captured on an ERP system. This means that when it comes to completing a VAT return, someone will have to manually trawl through the original invoices to manually input that detail. An exercise that could have been avoided had the correct tax codes been capturing when the transaction was uploaded. 

Your systems need to know what to do with that tax code 

Capturing the correct tax code is the first step. However, to really ensure VAT compliance, your system needs to know what to do with that tax code. For example, let’s say you’re a UK-based business and you’ve made a local sale in the UK. If the transaction is captured as a local sales standard rated, your system needs to know that it has to apply 20% VAT on that invoice. An example within the A/P space is if you made a purchase from the EU. Your system needs to know the VAT rate of that EU country or the supplier’s VAT number. 

Ultimately, your system needs to be able to cater for specific classification rules. This ensures that later on down the line, you can stay compliant by mapping your tax codes correctly to your VAT return. Ultimately, if you don’t have the classification, you can’t do it. And if your system is not set up to understand those classifications and rules and apply them, your VAT compliance and returns are doomed for failure. 

Global VAT authorities are digitizing. So should you. 

VAT compliance is not untouched by digital transformation. Digitization has made it easier for VAT authorities to control and gain transparency on VAT compliance. Ultimately, they are demanding that companies keep up too. For example, companies need to file returns digitally through SAF-t’s and they require granular levels of detail on your transactions. If you don’t have this level of detail, it’s just impossible to comply putting your business in a very difficult position. Ultimately, the foundational principle to managing your VAT compliance starts with a system that captures the data correctly. 

How to capture the correct tax codes in your ERP system

Your company can either set up your system to capture the right tax codes for all your sales and purchases transactions. However, you can also integrate third-party VAT compliance software such as vsuite to achieve the entire operation seamlessly. VATglobal is able to complete a full review of your business and help you to structure your system with the correct tax codes. This ensures you’re automatically capturing the correct codes for every conceivable transaction. The benefit of applying a third-party VAT technology is that its agnostic and can integrate with any ERP or accounting software.

Data is the key to VAT compliance so get it right 

Data should be the very first principle in your VAT compliance plan. As the world becomes more digital, it’s critical that your business sets up its systems to be capable of capturing tax codes, transaction types and the rules behind them. Without this, your business will forever struggle to remain VAt compliant and complete VAT returns correctly. 

If you have any doubts regarding how your ERP system is set up to handle your VAT compliance, speak to one of our consultants as soon as possible and we will help you structure it correctly.

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