IT FOCUS - As easy as falling off a log

Users and developers of financial software are caught on a perpetualnging rules, writes John Stokdyk. upgrade treadmill.

When Benjamin Franklin warned that taxes were inevitable, he forgot to mention that changes to the regulations were part of the bargain. No sooner does a chancellor fix a tax rate than another one comes along with proposals to change the regime.

While self-assessment, economic and monetary union and the year 2000 have hogged the headlines over the past year or so, Customs & Excise has wrestled with changes of its own.

A Customs spokesman explains that changes in the VAT regime come about not just from the chancellor’s budget, but also from tribunal decisions, the European Commission, or new Customs interpretations of existing rules.

These minor, incremental changes might appear to blight developers’ lives, but they build a lucrative, never-ending revenue stream into their products.

How are both short-term and long-term changes to the VAT regime likely to affect financial systems? And, more to the point, is the developer community adequately prepared to rationalise its approach to this eternal conundrum? As programmers like to point out, software is not a product, it is a process. But long-suffering users would no doubt like to know whether those processes are likely to improve.

Although VAT is a relatively minor part of most accounts packages, John Crooks, UK managing director for Norwegian software house Agresso, maintains that it does influence customers’ buying decisions. ‘Usually it’s based on experiences that haven’t been good. People ask for functionality which their current system doesn’t have,’ he says.

VAT does not have as long a history as income or corporation tax, but already it has mutated into a patchwork of different rates and special exemptions. Some products, such as publications, are VAT-exempt, while others are rated at 8%, 15% and 17.5%.

‘In healthcare and education, clients can claim back 60% of VAT on certain items,’ explains Crooks. Agresso’s product is able to cope with such nuances, he claims. ‘It’s very much a UK thing.’ He adds that US vendors tend not to be as comprehensive.

Crooks is supported by the Business and Software Developers’ Association’s chief executive, Dennis Keeling, who slates supplies that repackage US sales tax modules and call them VAT. Such products can only handle tax at the invoice level, whereas the different rates applicable in Europe need to be accounted for on a line-item basis, he says.

‘Buyers can be naive and don’t understand the implication,’ says Keeling.

‘Only when the VAT man comes along do they recognise the problem.’

Intra-country statistics

The biggest current headache for developers is not VAT calculation or exemption regimes, but the European intra-country trade statistics (Intrastat). Customs collects these monthly statistics from the accounts systems used by businesses trading with other member countries of the European Union. The information is then used to compile balance of trade figures and for other purposes, such as transport planning.

In 1993, Customs pushed responsibility for compiling Intrastat reports from import/export agents on to companies carrying out the trade.

Tony Thomas, R&D manager for Megatech Software, remembers: ‘I was in a meeting where we had a London-based VAT officer and one from Southend who were arguing with each other. We wondered how we were supposed to come up with something when they couldn’t even agree on what the rules were.’

The Intrastat furore helped encourage BASDA to set up a specialist VAT working party to minimise confusion for further changes.

The situation has improved tenfold, says Thomas, since the BASDA working party and Customs agreed a detailed specification for VAT in accounting software which forms the basis of the organisation’s formal accreditation scheme (see box, opposite).

Proposals are before the European parliament for further changes to Intrastat from next year that will simplify the forms. UK Customs is also changing its filing rules because it cannot cope with the mountains of printouts that companies submit, which then need to be re-keyed by Customs staff.

Trade listings generated as standard printouts from accounting packages will no longer be allowed.

Companies will either have to produce a close facsimile of the standard form, or file the data electronically. Customs is encouraging the latter route to save costs on both sides and reduce mistakes.

‘Customs has given developers financial incentives to support electronic data interchange for Intrastat,’ says Keeling. ‘It only represents a few days’ work for them, but unless customers are banging on the door, there’s no point in taking valuable resources off year 2000 and EMU work to do it.’

But, come 1999, this minor administrative change could come as an unpleasant shock to unwary suppliers and their customers, he suggests.

Over the next few months, Customs will be sitting down with the software developers’ working party to consider other issues that are likely to affect accounting systems.

Customs is moving forward its plans to streamline the rules covering retail VAT to cater for electronic point of sale systems and will shortly review the developers’ proposals on how they plan to cope.

Customs has grown tired of approving bespoke systems used by individual retail companies, and sees BASDA’s specification as a means of simplifying that process. Beyond that are two longer-term issues: electronic sales tax and the harmonisation of VAT across Europe.

National governments have already encountered difficulties with jurisdiction over products sold online. Where to charge sales tax on merchandise such as books and clothes is one problem.

However, telecommunications services and products like computer software do not pass through Customs’ grasp at a port of entry. The Organisation for Economic Co-operation and Development has distilled these issues into a set of key questions, but has yet to find any answers.

European harmonisation is the other big intangible. Customs acknowledges that the EC sixth directive governing VAT is due for a review, but official sources decline to make any predictions about the likely outcome.

One spokesman says that the sixth directive embodied a high degree of harmonisation, but national derogations (variations) from the basic rules made standardised national accounting and software systems extremely difficult.

Interviewed in Accountancy Age earlier this month, Customs’ head of VAT, Martin Brown, said the harmonisation programme was scheduled to take four years, ‘but it’ll take much longer than that’.

Brown is lobbying for common technical rules for movement of goods, and a European definition of the concept of a ‘taxable amount’.

Exchequer Software’s MD Eduardo Loigorri has already dealt with clients who have had problems with ‘triangulation’, where goods cross borders for modification and are then sold on.

‘If you sell something in the UK into Germany, but it is dispatched from Spain, it is very difficult to accommodate in software,’ he explains. ‘Companies are likely to encounter problems and possibly big penalties.’

Euro will help harmonisation

Nevertheless, Loigorri believes the euro will bring VAT harmonisation much closer and large pan-European companies will accelerate it as they get to grips with the different regimes within their internal accounting systems.

He accepts that the process will be painful, but emphasises that, unlike the transition to the euro, it will be a one-off change. ‘Once the euro proves itself a viable proposition, it would be very easy to bring VAT in line, probably within four or five years,’ he maintains.

It is hard to say which is the bigger challenge: achieving political agreement to move ahead on harmonisation, or ensuring that viable software will be available to account for the new regime.

One notable difference from the bad old days of the early 1990s is a new spirit of co-operation, in which Customs is actually helping software companies, and through them, their customers in business.

A Customs spokesman acknowledges the need to be proactive in this area: ‘We have to have a reasonable working relationship, otherwise the whole system falls to pieces. At the end of the day, their customers are collecting tax on our behalf.’

BASDA ACCREDITATION SCHEME

What do you do if you write a product specification and nobody uses it?

The VAT software accreditation scheme, developed by the Business and Accountancy Software Developers’ Association, is hailed as a comprehensive and valuable service. The scheme has three levels.

Level 1 covers the basics of calculating VAT on invoices, purchases and sales orders.

Level 2 includes level 1 as well as requirements set under the European Commission sales list governing the supply of goods and services to other member states.

The highest category, level 3, also includes the Intrastat requirements for reporting annual sales of goods worth more than #225,000 (see main story).

Customs has collaborated closely with the association on the specification and has gone so far as to offer a #2,000 subsidy to any developer that decides to seek level 3 certification for its product. Even with this incentive, only two developers have achieved level 2 – Megatech and US software house Solomon – and just one, Anagram, has attained level 3.

Julie Wedgwood, product manager for Sage’s PC market-leading Line 50 range, puts forward a dissenting view. ‘We’ve seen the BASDA spec,’ she says, ‘but we don’t feel it is going to sell any more software. Does the customer know what BASDA is?’

Complete confidence has yet to break through, even to developers.

Even developers who speak well of the scheme tend to damn it with faint praise. Infinium sales executive Chris Cadge is typical: ‘It’s a very detailed examination to get through. The accreditation process is a valuable exercise, but to get full certification costs time and money.’

‘We accept their comments that the VAT specification is complex, even though we’ve gone out of our way to make it as simple as possible,’ says BASDA chief executive Dennis Keeling.

‘We don’t want to water it down, but our ambition is to make as many software vendors as possible become accredited.’ To this end, he asked members of the association’s VAT working party to review how they could simplify the process. The most likely route would be to subdivide level 1 into two categories – a simplified ‘compliant’ rating that covered basic legal requirements and a ‘recommended’ level similar to the existing level 1.

The specification currently includes a requirement to collate VAT audit trails within accounting packages. This function allows Customs inspectors to track down the answers to any queries very quickly. The working party participants thought it was a useful feature, but many other developers would have to change their code to support it. It is likely to go into the recommended rather than compliant category, but could still be a selling point with end users, suggests Keeling. ‘Instead of putting up with the VAT man for a couple of days, it would allow them to do their job in a couple of hours.’

Eduardo Loigorri, of Exchequer Software, welcomed the review. ‘We found it was quite restrictive in the areas that were compulsory,’ he says.

But it also didn’t allow for the requirements of specific industries such as second-hand car dealerships or chemists, which we cater for in our software.

‘Before it was all or nothing but the compliant/advanced approach would open the door for many vendors,’ says Loigorri.