The VAT trap

THERE IS A SHIFT occurring. It has been happening slowly and for some time.

It is, of course, the use of indirect taxation and, specifically, value added tax (VAT) and goods and services tax (GST) as a way of bumping up the govvernment’s tax take.

The government is increasingly utilising VAT as a method of maximising tax earnings. For evidence of this, look no further than the pilloried ‘pasty tax’ and the levies on landfill, betting and gaming, air passengers, aggregates, climate change and insurance premiums currently under consultation.

The issue for businesses, though, is a lack of metrics by which they can measure their VAT and GST liability.

However, according to a survey released this month of 225 businesses based across 24 countries by KPMG, the idea that such performance measurements can exist for VAT and GST is outlandish.

The result is that many finance directors simply do not have any way of adequately seeing the outlay they have in VAT and GST.

The survey found that a lack of full-time resources and management generally leads to the dearth of measurement of VAT and GST liability and insufficient processes to manage that liability.

Specifically, only 23% of respondents have VAT and GST performance goals available for their CFO. In terms of what is perceived at the most important metrics for effective tax management, the effective tax rate, timely and accurate submission of returns and minimisation of interest and penalties were the three top priorities.

VAT and GST took just 4% of the vote.

There is much to be done to get CFOs and heads of tax to acknowledge the importance of managing their VAT interests effectively, while strides still have to be made to improve VAT’s visibility to CFOs.

So, what can be done to achieve this?

Primarily, awareness of the issue must be raised so that similar objectives on timeliness, accuracy and minimisation of interest and penalties can be achieved.

Businesses should investigate their current liability, take stock and devise a strategy in much the same way they have other taxes.

This, though, will be difficult to execute for a significant portion of businesses, given that KPMG’s study shows that 26% of businesses surveyed have no full-time equivalent VAT specialists, while 59% employed less than ten, with just 33% of firms employing a regional head of VAT.

It is a startling set of figures, and something that will impede many firms in their attempts to get on top of the matter.

If the government trend of introducing more indirect taxes to service the deficit continues, companies could find their VAT costs creeping up unchecked with little or no strategy in place to address it.

Of course, it is nothing that clear policies with practical guidance could not solve; it is just studying the numbers and interpreting them appropriately to minimise the hit taken.