​​

​

​

Introduction

​

​

The introduction of the Making Tax Digital (MTD) requirements in the UK mandated many organisations to automate or semi automate their VAT compliance processes. The benefits of automation can be significant if it is carried out robustly with strong controls built into the process.  Also with e-invoicing on the horizon in the UK and more rapid developments in this field in Europe, South America and Asia, VAT automation has become almost impossible to avoid or delay.  

​​

​​

​​

Benefits of Automation

​​

• Elimination of Spreadsheets that usually cause errors

• Elimination of the manual VAT return

• Automated VAT liability determination

• Immediate VAT Analytics

• Elimination of bottlenecks in the VAT return completion cycle 

• Elimination or reduction in human intervention thus reducing errors

• Prompts an organisation to undertake a complete integrity review of systems and VAT coding etc to ensure accuracy is built into MTD

• Reduction in VAT Risk if undertaking thoroughly 

• Automation of the Partial Exemption and VAT recovery process and significantly reducing the time and effort usually embedded in the VAT return process 

• Opportunity to map out and document system and workflow data lineage

• Reduction in Error Correction Notices submitted to HMRC 

• Enables the possible outsourcing of the VAT Compliance function and resources to be focused on specialist VAT advisory

• Closer integration with Finance

• Improved transparency and relationship with HMRC

• Improved management reporting by instant understanding of areas of the business that are consuming VAT

• Improved P&L VAT forecasting and Reporting

• Facilitates quicker impact assessments for new products and changes in legislation

• Integration of static data such as VAT Rates, Client country of Operation /residence, exchange rates, VAT Group, Non VAT Group company markers, 

• Enables the development and build of a central Tax Data Hub which ingests, churns, organises and transforms data from various systems and sources in to a VAT Return

• Use of built in exception reports to detect and correct errors real time before the submission of the VAT Return 

​

​

Disadvantages of Automation

​

​

​

• Can actually create more bottlenecks and slow the VAT reporting process down if automation is not end to end and lacks inbuilt controls

• Can lead to lack of transparency over processes that were more visible using manual processes 

• Can impact VAT P&L reporting if analytical reports and tools are not built into the automated process

• Due to lack of detailed information that would normally appear on spreadsheets there can be an over reliance on automation and assume the data is always correct.

​

​

How to Go About Automating the VAT Compliance Process

​

​

Larger more Complex Entities

​

The amount of effort and work that will be required to automate the compliance and reporting process will directly depend on: 

​

• The existing level of automation 

• The number of different systems in use for VAT reporting

• The size and complexity of the organisation

• The complexity of the Partial Exemption Method

• The number of manual processes and adjustments required for VAT reporting

• The method of automating the process internal IT department or External consultants

• Number of externally supplied systems used 

• The existing skill set of IT, VAT and Finance staff within the organisation 

​

​

Step One - Planning and Budgeting

​

​

The first action point for any compliance automation will be to draw up a project plan detailing:

​

 

​

• The design of the automated process - what is it expected to look like and how it will work in practice 

• Key project timelines and expected delivery dates for each stage of completion

• Key personnel  and what parts of the project they are responsible for

• List of controls that are required to ensure the integrity of the data and to protect any sensitive customer data

• Any external software or systems being used and details of when and how they will be engaged in the automation process

• Any pinch points such as any project overlap with key BAU reporting time frames

• Budgets for the cost of implementation at each stage 

• Key business area / management sign-offs required at each stage

• Software that will be used to automate the process and any licencing required

• The future cost savings and efficiencies to be derived from automation 

• Testing process and expected dates

• List of systems, data sources, software, that will need to be reviewed (see next step)

• List of static data / sources in use that will need to be incorporated 

​​​

​​

​​

Step Two - Draw up a list of Processes and Systems 

​​

​​

​​

​​

The second stage of automating the VAT compliance process will be to carry out an inventory of the systems and processes used in the VAT compliance and reporting process. 

​

Typically this will include: 

​

• Accounts receivable systems used to invoice / bill clients and record sales and 

• Accounts payable systems used to process invoices, record costs and VAT

• Systems used for e invoicing or in conjunction with

• Systems used purely to record transactions that then feed accounts receivable and payable systems

• System to system interfaces 

• Cost allocation systems that are used to carry out complex cost allocations in large organisations

• Exception reporting systems that feel from any of the above systems 

• Any other manual systems or processes used in the VAT reporting and compliance process

​​​

From the full list of systems, it will then be necessary to categorize the systems into in-scope and outside scope of automation.  Often you can have front end bespoke systems that feed into larger main systems and as such including them all would mean duplicating the data.  Therefore in such situations, it is necessary to extract the data for automation from the main system and thus reduce the number of data sources.  For example there could be 4 bespoke billing systems that all interface into SAP and as such it maybe possible to extract all the required data for automation from SAP instead of from all the individual systems.  So as part of the scoping exercise,  4 systems could be categorized as outside the scope for automation with only SAP being in scope for extracting data for the automation process. 

​​

Step Three - Carry out and Integrity Review of the Systems for VAT Reporting

​​​

At this point in the process, it can be a good opportunity to conduct a review of the VAT reporting (including legacy VAT Reports) and controls in each system to ensure that VAT is being booked and reported accurately.  This will usually only be necessary if there has not been a regular or recent review.  This is a crucial step as the automated process will need to be tested and signed off for accuracy.  In larger organisations, the Internal Audit department may want to review the end to end  automated process and as such having done a full integrity review may provide them with comfort. 

​

Step Four - Identify the Key Mandatory Fields Required from Each System 

​

​

The ultimate objective of any VAT reporting system is to ensure that accurate VAT returns are generated and ready for filing to HMRC.  Therefore it is imperative that the key fields available in each system are incorporated into the automation process to ensure this objective is met. 

​

Examples of these are:

​

• Invoice Amount Gross, Net and VAT

• Invoice / transaction date

• Details of the transaction

• VAT code applied to the transaction

• Customer type (business / consumer) 

• Customer country of operation / residence

• Product type

• VAT classification code SR, ZR, Exempt

• Customer Id

• Transaction Id

​​​

Step Five - Identify all the Manual Adjustments that are Carried Out

​

It is often the case that there are many manual calculations and adjustments that are carried out as part of the VAT reporting process and these need to be identified so as to eliminate and build into the automated reporting process.  Making Tax Digital requires digital linking so eliminating manual processes will help to ensure compliance. 

​

Step Six - Identify any Static Data that is Consumed as Part of the VAT Reporting Process

​

Often in manual VAT reporting Processes where spreadsheets are used there will typically be static data such as FX rates,  VAT rates, customer location data, VAT recovery percentages, VAT allocation percentages, profit / cost centres etc that form part of the VAT calculations. 

​

Step Seven - Build a Central VAT Data Warehouse or Hub

​

Once all of the systems, data sources and manual processes and static data have been identified and categorised into in-scope / out of scope, then it will be necessary to build a VAT Data Warehouse or Hub to Extract and Ingest, Store and Transform the data into a VAT return ready for filing to HMRC. 

​

This element of the project will be the job of either internal or external IT specialists who can build the necessary code to ingest and transform all of the data into an accurate electronic VAT Return.   Additionally static data tables can be built into the VAT Data Warehouse via links.  For Example links to HMRC exchange rates or links to client on-boarding static data systems.  Data Analytics tools such as Alteryx, Tableau, Power BI, SAP Agile or  RPA "Robotic Process Automation" software can assist in transforming data and also adding robotics to replicate tasks normally carried out by humans but without the risk of manual errors.

​

Also where the organisations Partial Exemption Method is complex, it may be necessary to build an automated VAT Sector allocation and VAT recovery calculation engine within the VAT Data Warehouse or bolt on a bespoke system build by an external vendor to allocate and calculate input VAT recovery for different areas of the business.  (Anaplan for Example)

​

Note: Testing of the systems should be conducted once built to ensure it meets the objectives set.

​

Step Eight - Linking System Data, Static Data to the VAT Data Warehouse

​

Once all of the system reports, data sources, and static data requirements have been identified, it will be necessary for Tax, Finance, IT and external system vendors, external IT consultants to work collaboratively to link the data to the VAT Data Warehouse in the correct format ready for transforming and calculating the final VAT return. This will normally be done using Application Programming Interface (API's).  

​

Note: Testing of the links should be conducted once built to ensure they transfer the data as required.

​

Step Nine - Filing the Automated Electronic VAT Return to HMRC

  

The electronic filing of the VAT Return to HMRC will be the next process to automate.  This can either be carried out using bridging software provided by a software provider where figures from the VAT return are linked to the software providers E filer and then onward transmitted to HMRC or the whole filing process can be managed by an external company where they can build a link to the organisations VAT Data Warehouse and the whole  VAT reporting, sign-off, partial exemption VAT calculation, MI reporting and filing to HMRC will be managed by the organisation using the software provided.  

​

Note: Again testing should be carried out to ensure the VAT Returns file correctly. 

​

Step Ten - Post VAT Return Management Information

​

The final leg of the automation (if not already built) would be to build a VAT reporting MI function that enables key reports to be generated from the data. These reports would be used in reporting key metrics to management such as:

​

• Total Output VAT per Function / Sector 

• Total Input VAT per Function / Sector

• Total VAT by Cost Type (which areas are consuming VAT)

• Total VAT recovery by Function / Sector (E.g. Banking, Equities, Fixed Income, Credit) or ( Hotels, Bars, Restaurants, Cafes, Convenience stores) 

• VAT recovery by Subsidiary, Branch

• Irrecoverable VAT by Sector, entity, region

• Reverse Charge VAT by sector / entity 

• Variance analysis and charts comparing month on month, quarter on quarter, year on year

• VAT recovery rates aligned to each sectors VAT pool

• VAT allocation drivers

• Fully recoverable VAT by sector / function / entity

• Other

   

The greater the detail and clarity of the reports, the more beneficial they will be for management reporting. 

​

Automation for Smaller Entities

​

The digitalisation and automation of smaller entities is less likely to involve the internal build of bespoke systems and more likely to involve smaller firms buying and using off the shelf Accounting and Taxation Software which can be purely cloud based. These packages will have all the necessary accounting, VAT, Tax and reporting functionalities built in to enable businesses to become automated and digitalised relatively quickly without any major need for internal software or systems development.

​

Mainstream software providers such as Sage, Zero, IRIS, Quickbooks just to name a few can be purchased and used by either business owners or their Accountants for accounting, VAT and general Tax reporting.

​

That said, the automation of VAT Compliance and Reporting for smaller entities can be completely bespoke and built by IT specialists to the specifications and requirements of the business. Many of the steps (above) that may be used by larger entities can be used for smaller entities.    

​