How to avoid common VAT determination mistakes and stay compliant

Indirect taxes can be some of the most perplexing to calculate correctly the first time and filed correctly — especially when paired with HMRC’s Making Tax Digital (MTD) mandates for digital record keeping and reporting. While intended to simplify VAT across the EU, the MTD initiative has contributed to an additional amount of confusion around rates and payment responsibilities, as well as differing requirements specific to individual EU countries. Determining when tax needs to be applied, how much, and when and how to report these taxes can be daunting. Understanding the basics of VAT determination and compliance can help businesses avoid common VAT errors and other mistakes —not to mention staying out of the way of unnecessary audits or penalties. 

The basics of VAT compliance 

Like sales and use taxes, value added taxes (VAT) are an example of what some call indirect tax — that is, one that is collected by the seller who charges the buyer at the time of purchase and then pays or remits the tax to the government on behalf of the buyer. 

VAT activities are typically divided into three areas: record, validate, and report, each impacted by digitisation: 

• Record: Initial transaction data is collected during the record stage but not recorded by the tax department at this point. 

• Validate: The validation stage ensures only tax compliant data is included in the return and, once complete, a final report is filed with the tax department. 

• Report: Due to increasingly limited time frames, companies will need support from tax technology during the reporting stage. Automation becomes critical at this point for specific tasks, like ERP-mapping tax codes to accounts payable and accounts receivable documents and real-time reporting. 

As an example, the current rate of VAT for most purchases in the UK is 20%, however, a reduced rate of 5% is charged on certain products including energy saving measures and children’s car seats. Other exceptions include a zero-rate on most food, books, newspapers, and children’s clothing. Although no VAT is charged, the sale of zero rate goods and services still must be recorded and reported on a company’s VAT return. Some transactions that are exempt from VAT include postage stamps, financial, and property transactions. 

With VAT, the seller is responsible for collecting the tax and remitting it to the appropriate tax authority. As part of the MTD regulations, reporting, as well as record keeping and communicating with tax authorities, must be digitised. 

Commonly made mistakes  

The most common mistake, regarding VAT determination and compliance, businesses make is a reluctance, especially amongst smaller businesses, to changing their existing, familiar approaches and legacy technologies. This may be due to systems not automatically keeping up with frequently evolving regulations, a lack of tax tech expertise, or concerns about costs and effort associated with changing to a digital model.  

Another common mistake is poor record keeping and lack of an audit trail (i.e. missing receipts and other defendable data). This is one of the problems MTD was designed to alleviate. Particularly in the transition phase, there will be those companies that are penalised for a lack of consistent and transparent record keeping.  

If you’re a company doing business in multiple countries, you know how difficult it can be to keep up to date with the tax regulations of each. This is another area where problems can arise from not staying current with changes in tax law and regulations, particularly with global tax laws. 

Keeping records and staying up-to-date 

Record keeping is one of the most critical aspects of compliance with MTD — and getting it wrong can involve costly penalties. All accounts payable and accounts receivable data must be stored in electronic format, ideally using functional compatible technology – in other words, technology that can be used to store records, perform the required calculations, and submit the information to HMRC directly via their API.  

If there’s one thing that’s certain about UK tax law, it’s that it won’t stay the same for long. So, how is a company to keep up to date on the latest evolutions of VAT regulations? One method is, the HMRC offers regularly refreshed information including email updates, videos, webinars and more to help you navigate VAT and MTD reporting changes at www.gov.uk/guidance/help-and-support-for-vat. 

Letting software do the hard work of meeting your VAT determination and compliance requirements

While many small businesses have chosen a bridge solution to address their reporting needs, this can never be more than a temporary solution. A comprehensive software platform can not only meet all the requirements of the HMRC’s MTD initiative but also save time and money in the longer term, while mistake-proofing the reporting of VAT. A solution such as the Thomson-Reuters cloud-native, ONESOURCE suite of software can automate your determination and compliance, eliminating some of the most complicated and onerous parts of the MTD process.  

Choosing a comprehensive worldwide solution for the efficient and consistent calculation and recording of your indirect tax liability, including establishing VAT determination, is a matter of determining size and scope of the software you need for the scale and scope of your VAT activities. These solutions can provide business-critical tax determination and calculation on all transactions, using up-to-date tax content for the highest degree of accuracy – from transaction to remittance.   

In addition, for businesses operating globally, a platform such as those offered by ONESOURCE solutions can also help automate the compliance reporting of not only VAT but also GST and other international tax returns and statutory filings. 

Summary 

While VAT determination, calculation, and reporting may seem complex, there are a variety of simple steps to follow which will enable you to avoid misreporting and the potential, associated penalties. With a robust, comprehensive tax platform that automates the bulk of the process, businesses can manage their indirect tax issues more easily, and without the stress associated with manual reporting. 

ONESOURCE Indirect tax compliance software

Automate sales and use tax, GST, and VAT compliance in one simple software solution to improve the accuracy of tax returns and filings.