VAT Automation, a new alternativeALTax
There are multiple reasons for adopting VAT Automation. There is an increased complexity of Value Added Tax (VAT), regulatory pressure on risk management and control, increased attention to VAT by Tax authorities globally, too many transactions to maintain in control, not sufficient in charge of VAT compliance, seek cost and process savings, etc. That is why most companies are automating their VAT processes and/or are working on their VAT ICT strategy. New technology and improved Enterprise Resource Planning (ERP) and other host systems make this more and more possible.
Existing VAT Problems
Research has shown that European multinationals year-end-closing times vary greatly, putting up to 140 days between the most efficient organisations and the rest. Not only is this data required to make management and board decisions, but it also greatly impacts the tax function, in particular VAT.
Since VAT relies on the data after the month close/year-end, allocating resources and eliminating time waste have a great impact on meeting deadlines and further increases the pressure that tax departments feel during the end/beginning of the year.
Outdated processes play a significant role in creating time waste and inefficient allocation of resources, yet due to constant time pressure, the focus lies in continually fixing errors rather than sustainable process improvement. Many companies have accepted this as the norm, often resulting in low job satisfaction and continuous errors.
Manual systems tend to be difficult to manage and are therefore time consuming and error prone. Eliminating outdated practices can create valuable time savings that improve overall workflow and focus. Automation has played a critical role in helping many businesses implement lean finance practices.
For many, it is unimaginable to believe they were ever reliant on manual systems for their everyday tasks. So why has tax not caught on to the same extent? While many organisations continue to rely on manual VAT processes or the limited capabilities of their ERP, the reality is that the landscape and regulatory landscape has changed (and continues to change) so dramatically that these inefficient and rudimentary systems no longer are able to meet the need for those wanting to drive efficiency in their VAT processes.
Not all aspects of the traditional lean principles are relevant to the VAT process, but some of them can be adapted for relevant measures.
How Introducing Lean Principles to VAT Processes Creates Positive Changes
Introducing lean finance principles can go beyond cost savings and increased efficiency and it can also lead to greater reliability of financial data. Since many global companies tend to operate as a combination of local subsidiaries to singular standards instead of one holistic organisation, combining each financial data set in the end can lead to unreliable results. Despite the use of an ERP system, especially mergers and acquisitions, can result in multiple instances of one ERP or even multiple host systems which make it more difficult to consolidate data.
The team requires an efficient end-to-end approach in order to achieve KPI€™s and manage to gain structural optimization for creating reliable data. Sub-improvements do not tend to have a significant impact on overall productivity and waste elimination and provide a mere short-term focus for improvement. Once mapping has been completed and root causes are identified (e.g. the VAT data gathering process is too time intensive due to running multiple limited reports) solutions for improvement should be identified and the workflow remodeled. Practices should be rolled out company-wide to achieve that best practices are established and implemented.
Eliminating all non-value adding activities is not a straightforward task, careful mapping is required to gain the full picture of what causes mistakes, increases time waste and prevents an efficient VAT compliance process. Habits created by employees can often prevent change for continuous improvement since employees have found a way that they feel fits their needs but still leaves the root cause of the issue untouched since no better way is known or fear will impact the willingness for progress.
A breakdown of time spent on data gathering, reconciliation, analysis, review and reporting will highlight where bottlenecks arise and can be directly compared to issues e.g. insufficient analysis. Which process step, when time is reduced, would add the most value to the team/individual? What are common reasons for errors and additional time-consuming processes? What could be done to improve?
Optimised Finance Processes and Technology Infrastructure
In many cases, even the consideration of an improvement strategy cannot be approached as time is lacking to complete the mapping process. When implementing lean, the impact on other departments should be taken into account and making it a priority to find an overarching lean strategy to improve workflow in-between teams. Alignment of IT, finance functions and tax should all therefore be considered essential building blocks when creating a lean approach.
It is very important all team members are being included in the process to share their opinion and identify the underlying issues that create waste in the VAT process. Implementing a top-down approach often does not tend to include all team members actively involved in the process and therefore fails to eliminate waste in the end-to-end VAT process.
Uniform Reporting Standards
VAT automation can be a welcome addition to a lean tax department since many of the underlying principles can be established through cutting manual waste and establishing processes that create uniformity from subsidiaries.
VATware allows VAT teams to cut up to 80% of the data gathering, reconciliation and analysis process, eliminating wasted time that is otherwise done through time intensive manual steps. It also encourages team members to align their workflow cutting out waiting times and dependency as much as possible.
The process through VATware allows that all manual work besides the actual reporting is being cut out and therefore eliminates all manual errors and the time it takes to review. Each step is documented and offers full visibility for audits, contains VIES documentation and has each language return available in English further limiting time spent on translations, etc.