VAT Calculation: Improving Your Compliance

Accurate VAT calculation is the key to VAT compliance.

VAT is not an optional tax and ignorance of the rules is not a valid excuse for inaccurate VAT submissions, returns or payments. That’s why calculating VAT accurately is at the heart of VAT compliance. 

The VAT compliance process is centered on accurate VAT calculation using the correct rates and amounts of VAT on invoices both issued and received, prior to making any net VAT payments. Inaccuracies lead to unexpected payment demands, financial penalties and, if they become regular occurrences, added pressure from more frequent VAT compliance checks and audits. The significant time and financial cost of rectifying such issues is borne by the business. 

VAT: an evolving and pressurised landscape.

Fundamentally, achieving VAT compliance is based on getting your VAT calculations right and submitted on time. But VAT calculation has never been more complex. 

Governments and their tax authorities are focused on ensuring processes and audit procedures support efficient and effective tax collection. The scrutiny from governments and tax authorities around VAT compliance is intense. This is causing unprecedented change within tax regulation, as processes, and frameworks evolve at fast pace.  Adapting to the constant change to ensure VAT calculation, regulation, rate and exemptions, to be sure of correct VAT calculation is tough.  

The variety of VAT regimes that exist across the countries of Europe combined with the continued growth of cross-border trade in goods and services means that VAT calculation can have a major impact on trade - negative or positive depending on the scenario. This growth of cross-border trade, international transactions and e-commerce also has the effect of amplifying complexity. 

Businesses must grapple with multiple VAT regimes and tax authorities and the respective compliance requirements of each country where they buy or sell goods and services.  This last point is compounded by an industry sector talent and skills shortage, which means too often individuals making decisions that impact the VAT calculation are not trained in the nuances of tax.  

Arguably the burden and pressure on tax departments to comply with VAT requirements, in a timely fashion, has never been so great. So, how can businesses best make sure they get it right?  

How do I calculate VAT accurately and in support of VAT compliance? 

First, get your VAT rates right.  

VAT registered businesses have a duty to ensure VAT calculation is accurate. Is VAT being charged at the correct percentage rate - for example, is it the standard 20% UK rate or a reduced rate, or is the product or service VAT exempt? Is the total amount charged on invoices correct and has the correct amount been paid?  Businesses must also check that invoices from suppliers include the right VAT rates and should alert suppliers of issues before making invoice and related VAT payments. Unresolved inaccuracies will result in the tax authorities demanding the correct amount is paid. It could impact the businesses’ bottom line and potentially lead to financial penalties and fines. What’s more, incurring frequent fines, points to a significant issue somewhere within the business’s processes, which may result in more frequent audits and compliance checks.  

Keep good VAT records and be audit ready at all times.  

Maintaining and creating VAT process related documentation in a consistent way for all transactions helps ensure you’ll have the right information for VAT calculation to be accurate. It also means you’ll have access to historical data should you need to analyse anomalies or errors from the past. Track transactions so that you can match these with documentation and spot errors. Keeping high quality records also helps ensure you are audit ready in the event of a VAT audit or a VAT compliance check.  

Submit your VAT returns on time.

Penalties and interest charges are not good for business. Late submission creates unnecessary risk of these additional costs and if persistent, can negatively impact your relationship with tax authorities - where trust and transparency are key. Submitting VAT returns in a timely way also allows your business to reclaim any input VAT helping with the overall business cashflow. 

Embrace VAT automation technology.  

Digital tax transformation is born of a greater need for automation, data management and accurate calculation in the midst of increasing complexity. Tax teams should work closely with IT teams to ensure digital transformation initiatives, including migration to the cloud, consider VAT compliance and tax team’s process requirements. Vertex software addresses the challenges of the changing tax landscape in the UK, across Europe and beyond. Minimise errors and create accurate VAT calculation and reporting with workflow automation, rule-based data quality and validation tools and seamless integrations with data and reporting tools. Vertex solutions work alongside our continually updated content database - with over 700 million effective tax rules, including VAT rates and exemptions across over 20,000 jurisdictions. Vertex VAT solutions help support every step of the determination, calculation, and compliance process. To cope with the changing demands and huge pressures discussed, the need for relying on intelligent technologies like Vertex has never been greater.