Indirect Tax Best Practices

Jan 13, 2025 | Syndication Cloud

Originally Posted On: https://thevatconsultancy.com/indirect-tax-best-practices/

Indirect Tax – Global Trends and Best Practices for Businesses

The global indirect tax landscape continues to throw fairly major challenges at indirect tax teams dealing with UK and/or global VAT issues.  Some of the key hot topics at the moment include the following:

  • E-invoicing
  • Harnessing AI
  • Automation of Compliance Processes
  • Keeping abreast of global VAT rule changes (particularly if you operate in the B2C environment)
  • Tax Authorities using data lead approaches to audits

These are all fairly sizeable issues and it isn’t always obvious where to start on these.  This article will give an overview of some key steps you can take to ensure the indirect tax team is in a good position to progress initiatives in these areas by exploring what the above mean on a day-to-day basis for indirect tax teams.

 

Indirect Tax:  Global Trends and Best Practices 

Trend: E-Invoicing

E invoicing has been on the agenda for some time now and is the process by which VAT invoices are transmitted to the customers in a secure environment, sometimes passing via Tax Authority software to be authenticated/approved.  Some countries have implemented mandatory rules for this process and unfortunately these vary by country.  All however are underpinned by a common purpose, being one of managing VAT fraud.  The focus is on ensuring the transmission of the invoice data is secure so that data elements (eg the VAT value) cannot be changed, thereby ensuring that the output tax declared by the supplier equates to the input tax credit claimed by the purchaser.  The inclusion of a pit stop with the tax authorities for invoice authentication is aimed at reducing the risk of fake invoices being created to claim input VAT credits.

Best Practice: How Can you Prepare?

In terms of what indirect tax teams can usefully do now to prepare for these changes, you can ensure that your customer and supplier master data processes are robust and that you have good quality data captured for VAT purposes.   Data used on VAT invoices is typically very similar worldwide and therefore if you have no gaps in your current data, eg customer VAT registration numbers, the transition to e-invoicing for a particular country will be easier, and should be one involving IT and systems rather than something that requires a huge amount of input (other than oversight) from the tax team.

 

Trend: Harnessing AI

AI tools can be extremely useful for busy indirect tax teams needing to create content such as process documents, training notes and guidance for the tax team and the wider business.  It isn’t uncommon to find it difficult to create these as it can be a time consuming task, often put off due to competing priorities.  This is where AI comes in – it can help you get things moving by doing the ‘heavy- lifting’ in relation to the initial framework for such documents.  The output will be plain vanilla in nature but you can then layer on your business’ commercial fact pattern to ensure it is accurate and relevant.  We wouldn’t advise using AI for VAT advice as such and you should tread carefully, but AI generated documentation could get you 70% of the way to producing what you need.  The indirect tax team then layers on the complex part of how the various VAT rules interact with each other, giving you something accurate and fit for purpose.

Best Practice: How Can you Prepare?

If you haven’t yet dipped a toe in the deep waters of AI, it is worth gaining confidence in the potential  benefits for the indirect tax team by testing it out – ask ChatGPT or similar to produce a document on an area you are familiar with in terms of technical accuracy and content, and judge the output to see whether it would save the team time using a similar approach for other areas.  You don’t need to sign up for a paid subscription to do this.

 

Trend: Automating the VAT Return Process

Businesses regularly have business improvement projects running that involve the indirect tax team.  This might be in the form of a new ERP system, implementing a tax engine or trying to minimise manual input and process using tools such as Alteryx to do credibility checks and identify exceptions.  These are all very positive projects and are essential if the business has a large volume of transactions.    There can be pressure to stop using excel as a key tool but it is fair to say that it is still heavily used by most indirect tax teams.  Automated processes and excel aren’t mutually exclusive.  The most important point here is that you have good credibility checks built into your compliance process, not just based on the reconciliation of VAT data but on testing whether the underlying transactions are treated correctly for VAT purposes.

Best Practice: How Can you Prepare?

In terms of what you can usually do now to ensure the team is in the position to benefit from new automation projects, in the first instance the tax codes hold the key to accurate VAT data.   You should take the opportunity to ensure they are working effectively for you and being used appropriately by the business.  If not, consider rolling out further training to improve the quality of tax code use.  In addition to this you should check whether the master data is complete and that the front end processes impacting VAT compliance are accurate.   There is nothing more frustrating for the indirect tax team than knowing poor quality data has been transferred to a new system, meaning the enhanced functionality and automation adds little value, and, in some cases, increases VAT risk.

 

Trend: Keeping abreast with technical VAT Changes

This has always been a challenge for busy indirect tax teams as there is so much information available in terms of changes and updates.   This is particularly important however if you operate in the B2C sector as there is a global trend from tax authorities worldwide to act quickly to implement legislation to ensure overseas suppliers of goods or services to individuals in their country account for local VAT.  There are sometimes de minimis limits for overseas suppliers but not always if this would give them an unfair advantage over domestic suppliers.  Generally you can’t reasonably rely on advisors to update you on all relevant developments unless they have a retainer arrangement with you to do so.

Best Practice: How Can you Prepare?

In terms of what you should do now, we would recommend you identify a single source of comprehensive VAT and customs duty updates and commit to reading this each week, making  sure all team members are aware of any relevant developments.  Trying to read more than 1 typically leads to none being read.

 

Trend: Tax Authorities – Smarter Auditing

There is a move by tax authorities to use data they have collected from a supplier to carry out audits on their customer and vice versa.  This includes data they have from e-invoicing systems, automated filing solutions such as Making Tax Digital in the UK, and EC sales lists.  Particularly in the EU, the tax authorities seek assistance from other tax authorities cross border in raising queries.  The goal here is to deal with such queries promptly and to be able to shut them down so that a wider audit does not ensue.

Best Practice: How Can you Prepare?

In terms of what you could usefully be doing now, (this applies to VAT audits in your home jurisdiction too) – make sure you are confident in how your VAT return data is arrived at – the full end to end process, from the creation of supplier and customer master data, the tax determination process for sales invoices, purchase invoice coding, to the preparation of VAT return reports.  This should enable you to quickly respond to tax authority queries and provide relevant evidence requested.

 

Summing up Indirect Tax Trends and Best Practices 

In conclusion, the evolving landscape of global indirect taxes presents several challenges and opportunities for tax teams, particularly in managing VAT compliance. Key trends such as e-invoicing, AI integration, automation of VAT processes, keeping up with technical VAT changes, and adapting to smarter auditing techniques by tax authorities require proactive strategies. By focusing on robust data management, leveraging technology, staying informed on regulatory changes, and understanding end-to-end VAT processes, tax teams can better navigate these complexities. Effective preparation and adaptation are crucial to ensuring compliance, reducing risks, and optimizing the efficiency of indirect tax operations.

 

Specialist Indirect Tax Advice

The VAT Consultancy is highly experienced and provides relevant and practical advice to help you deal with the VAT and customs duty issues your organisation faces.  We provide global VAT and customs duty advice and VAT compliance services.  To discuss how we can help contact us today.