VAT Automation and Digital VAT Audits

Updated: Jun 8, 2021

The advancement in technology brings about exciting and cutting edge changes to VAT automation and digital audits. The impact is globally and paper based VAT audits will soon become redundant and replaced by Tax Authorities with electronic audits. We are already experiencing this approach by SARS on a limited basis i.e. VAT on importation, risk parameters and risk identification tools.

Accordingly, how businesses process and analyze VAT transactions today, compared to ten years ago, is phenomenal. It is all about automating information – instant processing which provides accurate results with minimal intervention from users and systems that are capable of outputting information according to very specific user-defined parameters.

Businesses can configure software to ensure that VAT is accounted for in the correct period, timely VAT payments are made, supporting documentation is electronically verified for compliance, automated recognition of VAT processing errors and generating the required VAT information for a VAT return in a tax period. Modern Enterprise Resource Planning (“ERP”) systems are powerful tools that are capable of boosting profitability and tax compliance through automation which substantially reduces time spent on compliance and risk management.

However, when ERP systems are not correctly configured to process VAT, tested regularly for issues that arise from software updates, or updated when VAT law amendments are made, then the same automation could result in major VAT compliance issues for the taxpayer. Such compliance issues may ultimately result in substantial penalties and interest.

Therefore, the importance of correctly configuring your digital accounting system to process VAT is critical. This process must always be planned and executed by both the business tax specialist and the IT departments, or external service provider. The tax specialist must take full control of this process to ensure that the VAT settings are configured correctly.

Regular reviews (at least once a year) of the VAT processing in the ERP systems should be conducted to identify risk. Often businesses require external assistance with this as it is a detailed analysis of all the data, for which businesses simply do not have the resources.

We will soon be in a new tax era where all audits will be automated by taxing authorities through Electronic data processing audits (“e-audits”) which evaluate the business’ VAT accounting systems and assist the Tax Authority to perform effective, complete, accurate, and quick VAT audits, based on data analytics.

In some countries like Spain, real-time VAT reporting is already a requirement. Meaning that the taxpayer must, through an administrative system, declare VAT to the Tax Authority as it is made, or within five days of the supply, depending on the jurisdiction. In Austria and France, for example, in addition to the submission of VAT returns, taxpayers are required to submit a Standard Audit File – Tax (“SAF-T”), which is an electronic exchange of reliable accounting data from the business to the Tax Authority, per the OECD.

Read more about real-time VAT reporting obligations in Spain. Updates on the real-time reporting obligations in Spain - Marosa VAT

In the United Kingdom, the “Make Tax Digital” initiative requires VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) to follow the Making Tax Digital rules by keeping digital records and using software to submit their VAT returns.

While in South Africa, SARS has not fully implemented e-audits and other real-time VAT compliance procedures, it is an inevitable progression. SARS is already collecting and using more taxpayer data than ever before.

Businesses must take the time to fully understand the importance of data and how it is analysed to highlight tax risk or tax opportunities. VAT IT’s data analytics team can provide detailed insight to ensure our Clients implement the necessary tools to mitigate risk.

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Article by: Diane Valadao

Associate Director

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