A recent study released by the European Commission uncovered that a whopping €160 billion was lost in EU VAT revenues in 2014. This ‘VAT Gap’ denotes the difference between expected VAT revenues and the VAT actually collected. The highest VAT gap of €36.9 billion was recorded in Italy, while Luxembourg had the lowest with €147 million. The UK reported €17.8 billion in unaccounted revenue. The study is part of the Commission’s work to clamp down on tax fraud and evasion.
While combating fraud and ensuring tax compliance are leading concerns for European businesses today, growing reforms in global tax regulations and the impending Brexit policies also herald the need for more efficient, and secure, VAT systems.
VAT Around the World
Globally, countries such as China, India, Egypt and the Gulf Cooperation Council (GCC) states, are placing increased emphasis on VAT collections or introducing new regimes. These new systems lead to further changes in international VAT requirements, and thus further complexity.
China, for example, is changing a number of minor VAT policies which include:
- Gift vouchers and cards are exempt from VAT
- Extension of the right to file only quarterly VAT returns
- Update and extension to the VAT tax code listing
- Services consumed outside of China are exempted from VAT
India will be implementing a new Goods and Services Tax, which will remove compounding tax on goods being moved across internal state borders – effectively creating an internal customs union.
With these new policies, how then should businesses keep up to ensure they remain compliant, while not losing out on revenue?
Brexit Enters the Fold
In addition to the global reforms already taking shape, new Brexit regulations can make the industry further convoluted. While negotiations for Brexit will not begin until 2017, businesses are already anticipating substantial changes for their organisations, according to a recent poll of tax professionals by Avalara EMEA. 68% of those surveyed predict that Brexit will result in their company paying more in VAT and customs. More than half (51%) said Brexit will lead to added complexity when it comes to VAT compliance. Despite these potential challenges, 54% have not yet started planning for Brexit at all.
Respondents believe the highest risks Brexit will bring for the industry include:
- 63% – Preparedness of HM Revenue & Customs
- 55% – Increases in customs and other border costs
- 45% – Adapting internal enterprise resource planning (ERP) systems
It remains to be seen what trade model will be negotiated once the UK leaves the EU. Respondents of the Avalara EMEA poll predict a Canada model, or Comprehensive Economic and Trade Agreement (CETA). The agreement has been seven years in the making and has yet to be ratified. CETA would distance the UK from the single market and would only partially cover the services sector.
Additional options include the Norway model, which would make the UK a member of the European Economic Area (EEA) and part of the single market. The UK would be required to pay a contribution to the EU market and be subject to all of its common regulations and standards. The Swiss model, a member of the European Free Trade Association, but not the EEA, offers more flexibility when it comes to applying EU regulations, and has a slightly lesser contribution compared to Norway.
Regardless of the model adopted, there will be further complexity in terms of VAT registration thresholds, triangulation, fiscal representation and bank guarantees, and paper-based EU VAT recovery.
VAT Automation – the Way Forward
The best way for businesses to address these current global changes, and prepare for Brexit once it does take effect, is to update their systems with automated VAT platforms. Cloud-based software solutions ensure speed and accuracy in calculating VAT rates and aligning to the latest regulations. This enables organisations to focus on running their business, without worrying about the threat of fraud or compliance. It also saves time and money when it comes to auditing and paying penalty costs.
More information on Avalara’s automated tax software, as well as updates on the latest industry news including Brexit, can be found at www.vatlive.com.