Almost half of companies (46%) in Europe do not feel confident about their capability to comply with the patchwork of European e-invoicing regulations, according to new research.
The problem is exacerbated asUK firms divert the fewest resources to the process, as well as not having in-house VAT expertise (46% of all companies don’t possess any), leaving those responsible scrambling to submit accurate information within deadlines. The situation forces more than a fifth (23%) of firms to search the internet for answers to crucial regulatory questions.
These, along with other findings, were published in a new whitepaper by VATGlobal Meeting the challenges of a changing tax landscape. With respondents working in finance and tax, the research highlights the current situation and challenges of the digital transformation in the European tax landscape, especially across the UK, Germany and Sweden.
“Governments across the region are taking Latin America’s lead and implementing electronic taxation systems, as well as beginning to shift to real-time rather than periodic models, with the intention of both simplifying tax’s traditionally paper-based reporting system and cumbersome processes and enhancing compliance to address the tax gap,” according to the author’s of the report. “However, developments have not been universal and a patchwork of regulations is fuelling confusion and complexity.”
Vexing issues around VAT
“The ongoing introduction of new tax regulations across Europe is leaving organisations scratching their heads around VAT,” said Gareth Kobrin, CEO of VATGlobal.
“In the UK, initiatives such as Making Tax Digital (MTD) are adding complexity when it was intended to streamline, and companies don’t yet have the right measures in place to comply. It’s an even trickier situation for exporters to nations with more specific rulings around document formats, such as Italy and Spain. Furthermore, many firms are making life more difficult by seemingly not making the most effective use of the limited resources they have made available to the function.”
There is an apparent reluctance from businesses to invest in tools with 51% of respondents expecting no investment in internal VAT functions this year. Of the 49% that do expect to invest in VAT functions in 2020, less than half (44%) anticipate investment in technology, despite its increasing necessity for compliance, efficiency and oversight.
Highlighting a disparity in expertise, 46% don’t possess an internal VAT expert and 23% search the internet for advice. 58% find ‘a lack of comprehensive understanding of VAT rules of different countries’ one of the three most difficult aspects of tax management. Most businesses (86%) do not use an online tax knowledge portal, yet, 43% consider it to be the easiest and most streamlined method of learning about tax and controls.
“Those responsible for VAT efforts are crying out for more resources but there’s an apparent reluctance from businesses to invest in tools; this disparity needs to be addressed,” continued Gareth. “Online learning portals are considered to be the most accessible method of tax education and, crucially, they don’t require the large upfront investment of other all-encompassing solutions or expert consultations.”
Priorities: Real-time reporting and e-invoicing
Easily accessible tax databases will become a vital tool and there’s an opportunity for some to put themselves on the front foot by addressing the issue now, according to the report. The most pressing issue for 29% of UK firms was real-time reporting. However, managing invoicing / e-invoicing ranks highest (mean rating of 3.77 on a ranking scale of 1-5) in the list of the most relevant indirect tax issues. This suggests a widespread reliance on older invoicing processes seen primarily as a finance and accounting function and a general lack of confidence, understanding and oversight of international regulatory shifts towards e-invoicing.
Nearly one quarter (24%) of respondents revealed that identifying areas of indirect tax risk within their firm was the top challenge, indicating a pressing need for a combination of relevant tools and resources to both understand relevant issues and having ability to monitor and address this on an ongoing basis.
Major tax reform highly unlikely post Brexit
There might not be any major tax reforms within the UK tax arena that the accounting professionals need to be dreading, according to Gareth.
“There isn’t a great deal of insight into how Brexit is going to affect the UK’s tax systems; the picture will inevitably become clearer once the process of leaving officially begins. But there are two contrasting forces that need to be taken into consideration.
“On the one hand, leaving the EU may free us up from the red tape of EU VAT directives, which has meant that, for the most part, Europe has been consigned to adjusting its tax reporting, rather than implementing e-invoicing in its entirety. This freedom could lead to a more substantial overhaul of UK tax processes in the near future.
“But in contrast, these more radical solutions often are brought into play by countries with sizeable tax fraud and VAT gaps, which isn’t as pressing an issue in the United Kingdom. With the full effects of Brexit on the economy and trade yet to be established, it’s also unlikely that HMRC will look to a major reform in tax processes until the dust has settled.”
Technology-driven VAT solutions
Based on the highlights from the report, Gareth feels European companies are changing their approach with regards to tax, for both inter-EU and intra-EU transactions. However, he also feels that as taxes move into the digital domain, it is not without its challenges.
“Looking at how large-scale organisations are approaching their tax functions at the moment, the main areas of focus are on speed and accessibility of information. If you’re trading with Italy and the near-to-real-time invoicing system, or again with the likes of Spain, Hungary and Poland, then you need access to tax data to report far faster than ever before.
“This means that the way tax data is organised, archived and shared is becoming far more dynamic than the tax returns and invoice folders of yesteryear. Businesses are looking to implement technology-driven tax solutions that allow them to meet the requirements for whichever countries rules they need to abide by.
“On top of this, as more and more tax regulatory bodies turn to short reporting windows and real-time e-invoicing, the bodies themselves are beginning to build up a tax return from the transactional reporting data they are receiving, looking to eventually eliminate the traditional tax return. While that is excellent when accurate, businesses need to be able to quickly find the information in their archives to evidence anything they think might have gone wrong when the bill lands on the doorstep.”
MTD and emerging technologies
A large part of the approach from companies is understanding the need for systems that are joined up. With the MTD mandate, Gareth feels governance towards emerging technologies like AI/ML will push the envelope beyond ‘just lip service’
“AI and automation are incredibly useful tools, but the old mantra of ‘rubbish in, rubbish out’ certainly applies to them. There is a lot to be said for automating the archiving, formatting and time frames for invoices, for AR, AP and reporting purposes. But it is vital that the rules that govern this automation are as accurate and up-to-date as possible, otherwise businesses may find themselves in more trouble than they were originally.
“This means that it’s just as important as it has ever been that organisations utilise human tax expertise, especially for the aforementioned determination part of the process. Automation, when run correctly, can speed up processes and minimise the busywork for these finance experts, but they need to be managed in order to provide those benefits.”