The Hidden Tax (Errors) Lurking in Receivables

As organisations strive to improve working capital amid tough economic conditions, leading B2B companies are discovering that a significant obstacle resides within their accounts receivable (A/R): inaccurate invoices.

Savvy tax managers recognise that tax miscalculations represent a common source of invoice errors. They also understand that invoicing errors lead to disputes between buyers and sellers, payment delays and higher invoice-processing costs.

The First Step in Mitigating Risks

The good news is that this widespread problem is eminently solvable. Mitigating the risk begins with an understanding of the cost and causes of invoicing errors.

In our work with A/R departments and corporate finance functions, we’ve seen invoice error rates as high as 20%. On the other hand, companies with best-in-class invoicing practices typically experience error rates in the 2% range. We’ve also witnessed the total cost of processing an invoice—from producing it, to submitting it to the customer, to following up on late payments, to resolving errors, and, finally, to payment—soar to an average of $150 per invoice due to high error rates. Within companies with leading A/R capabilities, average invoice-processing costs range closer to $10 per invoice or less.

Two Categories of Tax Errors that Cause Inaccurate Invoices

There are generally two broad categories of tax errors that cause inaccurate invoices. The first involves sales tax exemption mistakes. Mismanagement of sales and use tax exemption, resale and direct pay certificates frequently result in invoicing errors. The second category of common invoice tax errors involves mistakes in the application and calculation of valued added tax (VAT).

As tax professionals know quite well, there are numerous criteria that determine which taxes should be applied (or not applied) given a range of circumstances that vary significantly by jurisdiction. When any of that information is omitted or misinterpreted, chances are that you’ll wind up with an incorrect invoice, which will cause payment delays and related challenges.

Reducing Errors with Tax Automation

It’s also important to keep in mind that the frequency of both common types of invoice tax errors can be greatly reduced through tax automation, credit as a service, automated A/R solutions and several related actions that I cover in my next post.