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Lack of effective VAT planning makes businesses vulnerable

Tax directors caution that failing to adequately plan for changes to the VAT rules could expose businesses to oversights and exorbitant fines.

Tax directors are concerned that businesses that do not adequately plan for VAT and legislative changes may expose themselves to oversights by regulators and hefty fines for non-compliance.

Tax experts have expressed their concerns and advised internal tax practitioners to set up systems and procedures for handling changes to VAT and tax law.

According to Alex Baulf, senior director for global indirect tax at tax technology company Avalara in the UK, "one of the main challenges is just staying aware of changing global indirect tax requirements, new mandates, and regulations."

To track international VAT developments, including the digital services tax (DST) regimes, these include creating internal and online tracking systems. To make sure that businesses are coordinated from planning to implementation, tax professionals could combine project management with legislative planning.

According to a tax expert at a European e-commerce company, "a big chunk of what people in the tax area want from businesses is to stay in control and to keep on top of things."

Baulf emphasizes that there are risks associated with doing business.

According to him, "there are genuine risks of not being able to meet new requirements on time, ranging from penalties and interest all the way through to not being able to do business in a country."

When it comes to strategy, businesses do have a choice. To assist in meeting the regulatory requirements, they can put in place a variety of measures.

Businesses can either adopt a reactive or proactive strategy for handling legislative changes or issues in their businesses, according to Marta Pankiv, senior director and head of group tax at software company Tricentis in Austria.

According to her, companies that employ the reactive approach frequently fall behind the legislative curve and scramble to determine where they must register for VAT only after the legislation has been announced.

Due to this, businesses are forced into challenging circumstances with few options for resolving their problems or anxiety.

According to Pankiv, being proactive allows you to plan, work with your business, and see how to structure your flows and delivery from those flows.

The only thing that is certain is that the VAT regulatory environment will continue to change legally. Following the COVID-19 pandemic, the tax authorities are not likely to change their stance.

The majority of VAT regulation has been done in Europe. Due to this, the EU has stepped up efforts to harmonize VAT regulations across the union through programs like the One-Stop Shop (OSS), the EU's central processing system for VAT reporting.

By requiring businesses to register for VAT in just one member state rather than several, these measures aim to simplify the EU's VAT regulations. In an effort to close the compliance gap, some European tax authorities have also implemented electronic invoicing and electronic reporting.

The burden of businesses complying with VAT has also increased as a result of a global trend toward raising indirect taxes.

A tax expert at a toy company in the UK says, "we’ve seen that with increasing rates of VAT in Europe there have also been lots of other types of indirect taxes coming on board and now there are moves towards finding ways to have digitised taxes [returns]."

In the Asia Pacific region, where indirect tax regulations have frequently been introduced, even for business-to-business (B2B) services, Pankiv claims that there is also a trend toward ongoing changes.