Despite the shift towards indirect tax globally, it is acknowledged that VAT is under-managed in most large organisations, creating an increased compliance risk with exposure to interest, penalties and reputational risk.
Next to sales and cost of sales, VAT throughput (that is, the VAT applicable to these sales and cost of sales) is often cited as the third largest cash flow item and for many, represents the largest throughput of tax within a business. Yet, in spite of this, research has confirmed that only a minority of organisations have specific VAT performance goals, that documented processes are often limited, and that there is minimal internal knowledge of the level of VAT throughput in the organisation nationally and worldwide.
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All businesses have an obligation to deliver correct and complete VAT returns, but compliance with this obligation can be compromised if VAT accounting arrangements (i.e. from initial data input to the numbers that feature in the VAT return) are not fit for purpose.
As HMRC’s stated intention is to focus their attention on the largest and most complex businesses representing the highest risk and with an increasingly punitive penalty regime for careless errors made, it is more important than ever to ensure that VAT accounting systems and processes maintain a ‘clean bill of health’. At the same time, the need to identify opportunities to improve cash flow, reduce costs and enhance the bottom line provides a further incentive to improve systems and processes.
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Obtaining assurance that VAT accounting systems and processes are appropriate to manage VAT risks and take advantage of opportunities is a key priority for business, but one that provides a significant challenge due to the volume and nature of transactions, and the complexity of ever-changing VAT legislation.
In recognising this challenge, Baker Tilly has developed a VAT management review service that fits the nature and size of the business, adopting a phased, process-driven and technology-based review of systems. This includes utilising a highly advanced interrogation tool that can search and analyse millions of lines of data seeking out risks, both in territory and cross border. Our review service provides a detailed risk analysis report and assists Senior Accounting Officers (SAO’s) and tax managers by providing comfort on the risk areas and identifying and making recommendations for the improvement of VAT controls, including an action plan to achieve this. The report and the resulting actions are essential in demonstrating to HMRC that proactive steps are being taken to ensure that VAT accounting arrangements are fit for purpose and therefore assist in reducing the level of any penalties that may arise.
As Governments around the world shift their focus towards indirect taxes, it is more important than ever that businesses do likewise. In doing so, compliance risk and exposure can be mitigated and opportunities to improve cash flow and improve the ‘bottom line’ can be identified and taken advantage of.