By Claudio Cassanmagnago, Head of VAT at cost management consultancy Lowendalmasaï
A whole host of challenges face businesses operating abroad, not least of all VAT standardisation. Differing VAT rules, changing deadlines and potential language barriers make this a complicated area to navigate.
We would always encourage companies to seek advice at the earliest possible pragmatic stage as it is not difficult to fall foul of the rules. 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.
Companies are increasingly turning to new territories as part of their expansion plans. 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.
Potential reputation risk also has to be considered - 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.
Another common problem that companies face is overpaying on their VAT. 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.
Businesses that use Shared Service Centres (SSC) can be faced with hidden costs as it is possible for VAT to be wrongly posted or incorrectly claimed. 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.
Companies may look to perform VAT review in-house however it may not always be practical due to the scale of the projects. Experts can help review the input VAT ledgers to ensure the correct VAT treatment has been applied and identify potential VAT which need not have been paid. It is not just the identification, but also the additional investigation required to obtain supporting documentation that requires a time commitment.