How a good VAT strategy can bring profit to your company

Do you know the value VAT represents in your organization?

It is clear from the results of the most recent CFO Barometer that VAT is insufficiently visible and transparent in organizations. That is why it is important for CFOs and Tax Managers to view the subject of VAT from a broader perspective.

Greater focus on strategy and planning

A great many businesses consider VAT a cost item for compliance and a neutral charge for the end consumer. However, a good VAT strategy has a significant impact on the profit and loss account (P&L) and working capital.

When it comes to VAT, businesses often invest a lot of time and money in compliance and audits at the expense of strategy and planning. The results of the CFO Barometer confirm this: 86% of the respondents say that their VAT department devotes attention to compliance. 54% of those surveyed focus on VAT audits.

Only 36% refer to planning and strategy. This is unfortunate because a greater focus on the latter factors provides a better picture of the value of VAT for the profit and loss account.

What is the value of VAT and what is its impact on the P&L? Businesses estimate the cost at easily 20,000 euro per VAT number for tax filing obligations and associated checks, together with performing the necessary system adjustments to the local legal requirements. If you can keep that amount in your own pocket (annually!), that is a huge benefit. CFOs must look beyond mere compliance.

What does the VAT life cycle look like?

The VAT life cycle starts with accounting. After that, there are periodic compliance obligations and possible audits by VAT authorities. Then strategy and planning come into play. It is important to manage the entire cycle and not just the compliance aspects. Estimating the VAT value properly leads to a drastic reduction of expenses.

VAT at the top of the strategic agenda

Clear internal communication appears to be crucial for the success of a company's VAT strategy. VAT experts (both internal and external experts) do not always speak the same language as the CFO does. Nevertheless, they must place the topic of VAT on the CFO’s strategic agenda. The CFO Barometer reveals that over half of respondents think it is difficult to find someone who can explain VAT in understandable terms.

How does a VAT expert ensure that the subject of VAT is placed at the top of the strategic agenda? CFOs know and recognize that VAT is a transactional charge, but they have so much on their minds that a VAT strategy and planning are not always the priority. EY research has revealed that reporting via clear, concise dashboards is already a good start. Through P&L improvements - and an associated positive impact on return (ROI) - the CFO can be convinced to invest in a VAT strategy.

The results show that for over 80% of respondents no one is exclusively responsible for VAT follow-up in their organization. In other words, operational VAT follow-up (such as filing VAT claims) does occur properly in these companies, but there is insufficient attention paid to possible VAT opportunities and associated strategy. EY advocates appointing a person responsible for VAT with a direct line to the top of the organization.

Reporting via a compact dashboard

A transparent, clear method for reporting about VAT is crucial so as to demonstrate the VAT status in the organization. How many VAT numbers need to be managed? What is the value of VAT in the organization? What new regulations play a role? What positive impact can VAT have on specific projects? The dashboards EY uses include quantification methods that are unknown or not very well-known to VAT professionals, but which are highly efficient for finance professionals.

The answers to these questions must be reported periodically to the CFO. After that, he or she can make the right decisions so as to optimally support the business. As soon as you demonstrate possible opportunities from the VAT department, it is much simpler to convince other business units to come on board. EY developed a methodology (“VAT navigation”) to report VAT optimally via dashboards.

How does it work?

Spending less time on compliance and audits and paying greater attention to strategy and planning sounds simple. But how do you actually do it? EY gives clients greater insight into critical points for attention and opportunities via methodologies. Some concrete tools include a simple “tiering” qualification of VAT numbers, the implementation of a Tax Control Framework or the identification of concealed VAT costs that can be requalified as VAT assets.