2020 turned Europe’s economy on its head: to get it back up and running some governments reduced VAT on a wide range of items and extended payment terms for struggling businesses, allowing them to find ways to remain sustainable amid the pandemic.
In principle, such tactics are good news for businesses. They provide more flexibility, enable the market to run faster and improve competition. In practice, changing VAT rules can lead to significant challenges down the line – something that many businesses are experiencing today.
To learn more about the challenges our customers are facing, we ran a survey among 3,500 European business and finance leaders to ask them about the ways they handle VAT reclaim, the challenges they face and how they have adjusted to the pandemic*. Today, we are releasing the results of this survey, which show that the VAT reclaim picture is complex. This complexity boils down to three primary challenges: compliance in a multi-currency, multi-tax rate world; processes used to manage VAT reclaim; and the technology used to file and process expenses and invoices.
The compliance mystery
A majority of companies we surveyed reclaim VAT in up to 10 countries (76%); a little over a quarter state that VAT reclaim is vital to boosting their revenue and cashflow. The more countries a business reclaims VAT in, the more likely it is that they are facing a diverse landscape of regulations including adjusted tax regulations to help local businesses weather the storm.
This has created confusion among businesses, with more than half admitting that the COVID-19 pandemic has created challenges with understanding the impact of the changing VAT regulations on claims. Combined with the fact the pandemic has drastically reduced the amount of potential foreign VAT to reclaim for close to half of businesses, it’s clear that the tax picture we’re looking at today is very different to previous years.
Such a complex picture explains why with 14% only a small proportion of businesses have prioritised reclaiming outstanding VAT during the pandemic. And while you would be excused to expect businesses with the largest number of employees to reclaim VAT better, there is a threshold where the risk of non-compliance makes the project unattractive: companies of over 1,000 employees making €500 million or more in revenue. Simply put, the bigger the company, the more complex VAT filing and processing becomes – and with it, the higher the chances of penalties in case of non-compliance.
This issue needs to be addressed today, as half of all surveyed companies expect this complexity to get even more challenging over time, and a similar proportion believe that they will face more frequent audits and punitive penalties compliance in the future.
Simplifying VAT reclaim
While businesses will need to remain attentive about changing VAT rules and regulations, there are some easy steps they can take, starting with improving their internal processes. Four in ten companies are processing expense claims and invoices slower than before the pandemic. To counter this, companies are investing in digital transformation tools and processes: one in two have implemented digital tools to submit claims and invoices; a similar proportion has taken this one step further and deployed digital tools, including AI, to process these claims.
While these are steps in the right direction, the reality is that almost half of European businesses still rely on paper-based evidence for claims. This outdated approach to expense and invoice management is ill-adjusted to a world where remote working is the norm for many. It also creates issues with documentation for one in four businesses at a time when over half of finance teams were already struggling for time and resources, resulting in a surge in errors in submission and processing for four in ten companies.
Implementing digital tools would enable companies to simplify the expense claim and invoice submission process for employees, reduce the pressure on finance teams and ensure that all VAT reclaim operations are compliant with the company and government’s regulations. Many companies are already aware of the benefits of AI-powered tools designed to automate the process and improve VAT reclaim. These include better data and reporting to optimise spending, which is seen as a benefit of AI for 39% of survey participants, increased revenue back into the business (33%), reducing the penalties due to errors or non-compliance with regulations (31%), deploying the finance team to more strategic initiatives (29%) and reducing refused claims and improving the experience for employees (25%).
While digitally transforming the finance department is crucial, focusing solely on tools would be short-sighted. Over half of companies admit that they aren’t getting the best out of their digital tools, and a similar proportion admit that their system and process to reclaim VAT needs to be better defined. With that in mind, it’s clear that more needs to be done to ensure that businesses have the right tools, but also clear policies and expertise in place to manage their VAT reclaim potential properly and without having to worry about non-compliance. Only then will they be able to truly tap into the hidden potential of VAT reclaim.
To learn more about the hidden potential of VAT reclaim, please join us for our EMEA breakout session at SAP Concur Fusion Leveraging AI Technology to Ensure Global Tax Compliance on March 18th, 11:30am CET. The session will take a closer look the complexity of Value Added Tax and how businesses can automate the entire process and mitigate risks. Alternatively, learn more about our solution Concur Tax Assurance by VATBox here.
*‘The Hidden Potential of VAT Reclaim’ report is based on the views of 3,587 survey respondents in France, Germany, Italy, Netherlands, Nordics, Spain and the UK. The survey was conducted by Censuswide in January/February 2021.