Cost & Risk Management of VAT Compliance and Reporting

This is a common issue and creates risk for errors and misreporting. System constraints could create a scenario where accounts payables/receivables ledger data is extracted from company systems to create a manually consolidated VAT report. 
This is inherently flawed and presents risk such as: 


• The manually prepared consolidated VAT report not reconciling with your source data. 

• During a reporting cycle, corrections made manually in the consolidated VAT report may not be acceptable unless the adjustments are reflected in the source data as well backed up by correct issue of Invoices and Credit notes as required. 

• As the data is required to be retained for 5 years in accordance with the VAT Law, the risk is compounded if there is no proper audit trail in the event of enquiries or FTA audit 

• FTA may require companies to start filing FTA Audit File (FAF) in the near future for which companies need to have proper accounting records and systems in place to report transactional files as required for VAT reporting. 


Improving Your Approach

If you are seeking to improving this situation, a system-based model may require upgrading your existing IT systems or use other providers to support them with the required IT capability. Both options require careful planning, investment budgets, skilled resources and more importantly time. However, they will deliver benefits such to:

• Eliminate or reduce significantly any manual selection of tax codes to enable accurate recording and reporting of taxable supplies 

• Enable use of selectable tax codes to correctly record Supplier invoices to enable accurate recovery of input VAT 
To improve accuracy of your recorded purchases and supplies to correct tax codes, the use of a transactional tax validation tool will significantly reduce the number of errors and misreporting issues caused by human or system errors.

Impacts to Internal Capabilities 

A major contributor to a successful Group reporting model will be your company’s investment in human resources. Increasing the Group finance function’s skills and capabilities is essential and may also require injection of experienced resources. VAT can create unique challenges both on a commercial and financial basis and the Group function will be required to

1. Input to contractual or commercial terms to manage cashflow impacts
2. Lead the ongoing VAT reporting operational requirements
3. Guide and advise operating finance teams on policies
4. Act as escalation points
5. Liaise with internal stakeholders to manage changes from new legislation 


Research has shown a lack of attention on training and change management across the Group increases risks and can actually cost more than the required investment.

Summary

From our experience, these discussion points can improve the success of your Tax Group model. You may be faced with other challenges from a technical or business standpoint, however these factors represent the main areas of issues whether small or large business that can be better managed with:

• Enhanced visibility and sponsorship for central finance team 

• Fit for purpose controls and governance
• Appropriate investment in IT 
• Setting reliable and timely decision-making processes 
• Filling capability gaps and resourcing appropriately 

• On-going training and development to remain compliant 
In your assessment of your group reporting model, these pointers do not necessarily lead to major demands on your resources or investment. They may in reality reduce the financial impact to your business over the medium term and actually lead to better performance and cost of compliance.