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Tax, VAT and invoices: the foundations for true digital transformation

(Image credit: Image source: Shutterstock/MaximP)

In recent years, the rapid digitisation of all elements of business processes has left little room for slow adopters of technology. These days, it’s universally understood that businesses who neglect to refine and digitally transform approaches to customer experience risk getting left behind. The competitive advantage in today’s climate involves understanding that the world now operates as a digital ecosystem. So why is it that, when it comes to finance functions, the pace of technology adoption is markedly slower?

While many companies have grasped the concept of digital transformation, most have only just scratched the surface. The majority have some form of accounting software in place, and larger companies have in many cases spent many millions for ERP systems in the past decade or two. However, beyond these functions, technology budget is often not being used on crucial, associated functions such as data management, master data quality, the automation of supplier or buyer communications and associated financial controls. For many organisations, this means that important tax and accounting processes outside the ERP are often tied up in tangled legacy systems, and it is not unusual to see multinational companies work with Excel spreadsheets and PDF formats, which rely heavily on manual input, data entry and lots of employee focus. As a result, staff may be prone to make critical human errors when it comes to the vital areas of tax and accounting. 

An example of this is the recent fraud scandal surrounding Patisserie Valerie (opens in new tab) – the much-loved British high street chain. Here, a history of negligent auditing and bookkeeping has led to a truly catastrophic impact. What’s so worrying about this incident is the fact that it was the result of extensive fraud, misstatement of accounts, and manipulation of balance sheets. A potent mixture of errors, resulting in a seismic implosion of a once stable business; lessons must be learned from this situation. While it’s hard to know precisely which digital auditing processes that Patisserie Valerie had in place, it’s nonetheless safe to assume that digitised data management, reconciliations and financial controls would have mitigated against such critical errors.

It’s also this focus on periodic reporting and manual auditing that may well have distracted Patisserie Valerie – among others which have similarly fallen foul of the law – from updating their financial core. It’s no secret that change is coming in regards to taxation, with Making Tax Digital the precursor to potential more wide-ranging changes in the UK which can be seen in the likes of Italy. And neglecting specifically a future-proofed tax function is a sure-fire way to halt any transformation in its tracks.

Core transformations – digitising from the inside out

When it comes to digital transformation projects more generally, processes that deal with tax regulations are often overlooked. It’s usually customer-facing departments like sales, marketing and customer experience that tend to receive the lion’s share of funding and upgrades. This is because the likes of CRM tools and cloud-based marketing tech platforms have been proven to boost the efficiency of the process entirely. More than 75 per cent of CMOs (opens in new tab) admit that digital marketing will account for 75 per cent or more of their spending within the next five years, according to The Digital Marketing Institute, in contrast with CFOs, who continue to focus their attention on strategy and risk management (opens in new tab). So, the real question is: why is the heart of any business – the financial core – neglected from budget spend?

Manually logging and calculating data in spreadsheets is largely considered a time-intensive practice prone to error and has been outdated for some time now. While it’s great that this line of thinking has been applied to customer service management and marketing, it’s the financial and back office functions that are in desperate need of intelligently applied technology and automation – especially considering the complex tax regulations that businesses of all types must deal with.

VAT and e-invoicing in the digital age: the tides are turning

Historically, each time a transaction takes place, VAT rates are calculated and applied for each supply. This means that, whether a business issues or receives an invoice, it is crucial to ensure that the right rate has been applied on both sides of the deal, and that each trading partner is contributing the correct amount to the country’s economy. Each country establishes specific and inflexible legal requirements, to which businesses must provide evidence of their compliance – or risk incurring some serious fines. Unsurprisingly, this places an enormous amount of responsibility on financial professionals to calculate the right transaction tax. Without taking the right care, tiny mistakes could result in costly consequences.

All firms are legally required to store each invoice from each transaction. They are usually stored in books and paper-based records, or buried away in legacy software that is not fit for purpose. It’s also mandatory for these invoices to be retained for up to a decade – taking up space, poorly organised and liable to being filed incorrectly. In countries with Value Added Tax (VAT), tax auditors regularly perform onsite inspections of registered businesses to make sure reports and accounting entries are correct and supported by authentic archived invoices with the right tax rates. Getting all of this right is critical to avoid tax sanctions that can exceed your average company’s profit margins. Running indirect tax processes manually from a clunky financial core can create existential risks for a business. With governments now rapidly moving to real-time collection of indirect taxes by requiring electronic invoices to be submitted to tax administration cloud platforms for pre-approval, digitising back office functions becomes not just an excellent way to optimise business processes, but critical for survival.

Future-proofing begins with back office transformation

This new phase of real-time VAT processing and e-invoicing has just begun and it is rapidly influencing countries across Europe. The concept of continuous controls through digital tax mandates has been inspired by recent Latin American government legislation, which has been implemented to control and regulate largely cash-centred economies, which can be found in countries such as Brazil. There’s no doubt that financial technology is adapting – and businesses who don’t observe and respect this risk revenue slipping through cracks in their current software systems.

Standalone AP and AR systems are being transformed towards fully-fledged business networks, which involve multi-tenant cloud platforms hosting complex business processes. Modern, smarter technology means investing in financial software tools into the heart of a businesses, that contain flexible APIs and adaptors have made moving away from manual processes and spreadsheets easier to achieve. ERP vendors have caught on, and so are launching ambitious projects to migrate their customer records to cloud-enabled versions of their software.

Considering that finance functions remain so complex and integral to business process, it’s crucial that leaders turn their attention to modernising this fundamental element of enterprise. Companies must design robust strategies that anticipate what’s currently uncertain – the constantly evolving landscape of tax and trade regulation. For digital transformation to be truly successful, the changes need to be made from the inside out.

Christiaan van der Vaalk, VP of Strategy, Sovos Compliance (opens in new tab)
Image source: Shutterstock/MaximP

Christiaan is VP of Strategy for Sovos Compliance, which provides software that safeguards businesses from burden and risk of modern tax. He is currently Executive Board member of Digital Trust.