VAT regulations vary across Europe and it is key that businesses are aware of this when setting up or reviewing their accounting systems. Firms which do business in Europe need to ensure that they account for the correct amount of VAT in the correct Member State at the correct time. Failure to do so can result in financial penalties being incurred and exposure to additional VAT costs which will directly affect profitability.
“If VAT is not accounted for correctly, this can also lead to problems with customer relationships, as companies will have to spend valuable time resolving issues,” says Andy Spencer, Accordance’s Head of Consulting. “Preventative measures are often the best way to avoid these issues from arising, so making sure that you review your Enterprise Resource Planning (ERP) or accounting systems regularly can save you a lot of time and money in the long run.”
International businesses need to consider VAT regulations in multiple countries to avoid VAT becoming an unnecessary cost. A large number of VAT issues may arise due to the varying geographic nature of the services provided. As a result, it is important that the correct registration obligations and VAT treatments are identified, in order to ensure that any accounting or ERP systems can be coded correctly to take into account the jurisdictions where the business trades, in order to remain compliant.
An accounting system needs to identify:
• The VAT treatment of supplies made to business customers.
• The VAT treatment of supplies made to private individuals.
• Any potential obligations to register for VAT.
• Any other VAT compliance requirements.
When looking at VAT compliance and registration requirements in a particular territory, businesses also need to consider the following:
1. Where is the transaction taxable?
2. Who has to account for the VAT?
For many businesses, savings can be made once they become aware of their VAT obligations and their accounting system is coded correctly to handle these transactions. Savings can often be made in three main areas:
• Absolute savings where additional amount of VAT is recovered.
• Cash flow savings which mean that a business is able to use the VAT within its business for a longer period of time.
• Compliance savings, which reduce administrative costs in dealing with VAT obligations.
“ERP or accounting systems are often turned to by businesses to help to ease the burden of VAT obligations when trading in multiple territories, and when they are set up correctly they can be really beneficial by automating many of the processes involved, including producing VAT invoices,” says Andy.
With regards to sales, the review process should take into account:
• Which revenue stream is each transaction relating to?
• Which countries are involved?
• Who customers are (business customer/private individuals/combination of the two)?
• The correct VAT treatment to be used based on the above information. If a VAT registration is required in that country. The necessary invoicing requirements, including the correct narrative.
With regards to the purchases made by a business, it should similarly identify:
• If VAT has been correctly charged?
• Is the input VAT recoverable?
• If it is recoverable, what is the appropriate method of recovery?
Adds Andy: “It is very important to clearly identify the correct VAT treatment for each sales scenario and to review this regularly, because VAT rates and thresholds are liable to change – especially in an unstable economic climate like we have at the moment, with tax authorities trying to maximise their income.”
European VAT distance selling regulations require companies to register for VAT as non-resident traders in each country where they exceed distance selling thresholds. Once registered, the company is then required to charge local VAT and submit VAT returns. However, given the administrative and technical burden of assessing when thresholds are breached, managing overseas VAT registrations and related VAT reporting obligations, many companies fail to stay compliant with regulations.
Accordance is a unified VAT Compliance and Consulting practice, with a focus on cross-border transactions.
The company provides practical, commercially beneficial VAT assistance to blue-chip companies across the EU and beyond.
Accordance assists a full spectrum of international businesses to better manage cross-border VAT costs.