Dealing with new software mandates

In April 2019, the UK will begin radically reforming the way companies track and file VAT transactions. Companies that are not ready for the change now are already behind, and many are looking to software vendors to help them catch up.

However, some vendors aren’t as ready for Making Tax Digital (MTD) as they should be. The MTD initiative is really just a symptom of a much larger global movement towards “always-on” tax inspection built into enterprise software.

Before VAT was digital

For years, tax administrations in Europe and elsewhere prohibited the use of electronic invoices or other business documents that are key for indirect tax collection.

All of that changed with an EU Directive in 2001 that allowed businesses to use electronic invoices for VAT purposes, so long as those businesses could prove the integrity and authenticity of the invoices over a period of up to 10 years.

These optional EU rules led to a patchy adoption of invoice automation. Suddenly, there were a multitude of different standards on all levels.

Furthermore, many European countries continue to struggle with massive “VAT gaps”. Hundreds of billions of euros that should be collected in VAT never make it into the nation’s coffers, due to fraud or errors in the way businesses administer VAT.

Latin America as a model for European VAT enforcement

At the same time, governments in Latin America introduced real-time controls on business transactions, that turned out to be extremely effective. They introduced tax administration platforms, such as a “third trading partner”, with which key transaction data is dynamically exchanged within business-to-business purchasing or sales cycles.

Cash-strapped EU tax administrations are now turning to these Latin American methods of digital tax enforcement, but they are going about it in different ways. Some, like Spain and Hungary, are changing the rules for periodic VAT returns by increasing reporting frequency and data granularity. Others, like Italy, are converting online platforms that were initially built for public procurement data exchange to Latin America-style real-time invoice clearance platforms. MTD is the UK’s version of the same phenomenon.

Problems with standardisation in the wake of VAT regulatory changes

This diversity of approach is creating significant challenges for businesses, particularly those that want to standardise using a single set of corporate systems and processes across subsidiaries.

Companies have to hold off on their multinational digital transformation strategies as country managers focus on contracting with local vendors, in order to meet aggressive digital tax mandates, ones that corporate systems are rarely equipped to meet.

Moreover, the ability of governments to stop consignments until associated invoices are tax-approved upends decades of fine-tuning supply chains to incorporate concepts such as “just-in-time” inventory management.

Difficulty in finding the right VAT solution

Businesses expect their software vendors to shield them from this global tsunami of intrusive digital tax programmes, but global software vendors are often caught off guard whenever a country announces another short-term mandate.

One challenge software vendors face is the fact that there is often little guidance on how tax administration APIs  – the approval or reporting of transaction data – should be weaved into the complex orchestration of procure-to-pay, order-to-cash, and approval workflow data that are the beating heart of accounting and other enterprise systems.

Making things (much) worse, software vendors that want to support multiple countries’ digital tax connections must set up teams with legal and technical experts to monitor the constant changes that tax administrations make to refine their technology, in order to close any emerging loopholes.

What companies need to look for in VAT management

Clearly, enterprise software vendors that can commit to covering continuous tax compliance mandates as they are announced globally will provide the most benefit to their clients.

While technical functionality is important, it is ultimately useless if a vendor cannot adopt regulatory changes into it as and when they happen. In that sense, the type of vendor companies need to find in order to stay ahead of evolving VAT regulations is as much a service provider and regulatory expert as it is a pure software vendor.

MTD in the UK joins a growing list of VAT-enforcement efforts around the globe, notably those in Latin America, Italy, Hungary, and Spain. Keeping up with VAT enforcement mandates is nearly impossible for most businesses, and is even difficult for those vendors that sell software designed to reduce regulatory risk. Part of the due diligence companies have to do when finding the right software provider is making sure the provider has prepared sufficiently to meet the challenges of new mandates.

Regulatory expertise and responsiveness is critical. Governments’ desire to close VAT gaps will inevitably lead to more frequent and stricter VAT enforcement regulations. MTD in the UK is only getting started, and it’s part of a rapidly growing global phenomenon. Now is the time for businesses to prepare – not just for the regulations that exist, but also for those to come.