Munster’s first independent VAT consultancy practice providing specialist VAT and Indirect tax advisory, assurance and interim management support services to owner managed businesses, small & medium enterprises, accountants and legal practices.

Are businesses managing their VAT: A war story

Tuesday, February 15, 2011

by Nick Ryan

Sometimes it is another party’s problem or misdemeanour that stirs us to act and address our own concerns. Revenue has focused for some time, the Code of Practice being the kingpin of this focus, on stressing it is the taxable person’s obligation to manage their tax affairs and where the management fails then there is a penalty regime in place to deal with such failings.
What is surprising in today’s global business world is how often businesses under value VAT as part of their strategic plan. A high percentage of businesses have been identified as not having specific goals and performance measures for VAT and other indirect taxes and many would consider VAT as low on their priority list when considering their strategic plan and performance goals. VAT is one tax that when managed properly can be beneficial to a business in that it can provide for opportunities to improve cash flow, improve business processes, reduce costs and ultimately enhance a business’s bottom line profit.
For businesses trading globally there are increased VAT reporting and accounting requirements and with these a requirement to manage these obligations. By not doing so then there are implications for increased penalties, interest and disruption costs for a business together with a potential damage to a business’s reputation.
One recent example of a business which failed to manage its VAT which lead to catastrophic result in cost as a reslt of a basic error due to an assumption that the system worked is where a business who supplies goods won a number of contracts with non Irish customers including a leading UK company. The business improved their VAT reporting systems to manage the cross border transactions though continued to use the “bill to” address as the key determiner for the accounting of VAT. For instance if the bill to address was for an Irish address then Irish VAT was applied, where it was for a UK address then the intra EC acquisition rules were applied.
In this case, the leading UK customer opened up a division in Ireland to service its Irish consumer market. It continued to order product from the Irish business ordering from its UK head office though requesting shipment to its Irish divisional premises for the Irish market orders. Unfortunately for the business its VAT accounting system did not take into account where the product was delivered to and therefore failed to account for VAT correctly on the Irish divisions orders. Further misfortune was that this error went undiscovered for some time and was only identified during a Revenue audit. The result had a major impact both in cost and reputation for the business.
From my own experience during my twenty years in VAT is that the above is a very common example and the lesson has not been learnt. Businesses need to ensure that the consideration of VAT is an integral part of their strategy and business plan and, that the management of the VAT function is an integral and essential key to their success or failure as a business.
There is a need for us as advisers to understand more about our clients, is VAT considered as part of the overall business strategy, how is VAT managed by a business and does it produce the best result for the business. Ask your clients to complete the VAT Risk Assessment to refresh the picture. We would welcome hearing from your interesting VAT issues and stories and would welcome the opportunity of publishing these, no names mentioned of course, as an aid for us all.
To end this article I would ask how businesses the question: How confident are you that your business is VAT compliant and efficient?