Richard Cornelisse

The impact of VAT rate change on company’s compliance costs

In Audit Defense, Benchmark, Business Strategy, EU development, Indirect Tax Automation, Processes and Controls, SAP add on, SAP SLO renaming tax codes, System Landscape Optimization, Technology, Training, VAT automation on 14/10/2013 at 5:58 pm

Taxmarc™ SAP solution2

By Richard Cornelisse, Director Strategy & Sales of Taxmarc™

ORC International was commissioned by HMRC in 2010 to undertake research with businesses and trade associations to explore the compliance burden and commercial impact of the VAT rate change in 2008 in the United Kingdom.

In their report “HMRC Compliance Costs and Commercial Impact of December 2008 VAT Rate Change” ORC analysed that large businesses – businesses with more than 250 employees – spent on system change re this rate change between 235 – 4,040 hours.

If the hourly rate would be determined at EUR 75 per hour the overall system change costs would be between EUR 17,625 – EUR 303,000. Based on the definition used for large businesses it is more than likely that multinationals with multiple or complex systems will be in the higher range.

Due to the increased frequency of VAT rate changes and all the activities mentioned in SAP checklist for VAT rate changes, the costs of a multinational will likely be around EUR 50,000 and EUR 250,000 annually.

Writing the Business Case for Taxmarc™ Tax Code Solution

Via Taxmarc™ Tax Code Solution’s time-stamp design no new VAT codes are required in case of VAT rate changes. Only the effective VAT rate dates need to be changed in SAP. There will be a major reduction in maintenance effort and the risk of a shortage of tax codes is eliminated.

As the name and description of the tax code remains the same the Accounts Payable and VAT compliance processes can remain the same as well. All reports and templates that are using the tax codes (i.e. the VAT returns templates) do not have to be changed.

Changing VAT rates will be almost as easy as changing a sales price in SAP.

Final Tax Code Solution One Page Flyer

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An example of a business case:

“Our company faces a shortage of SAP tax codes soon what impacts the efficiency and effectiveness of our business processes negatively.

Overall, developing workarounds cost either a lot of IT and stakeholder’s time (internal or external) and extra management time is needed to avoid human errors due to manual intervention.

  • This project results in a significant reduction in labour and IT time needed. Reduce time spent only on ‘VAT rate change’ decreases annually from 4,000 hours to 20 hours average by July 2014.
  • This project will save at least EUR 250,000 per year and supports our corporate goal of cost reductions. Soft and potential savings are more efficient and effective deployment of employees, a reduction of head count in finance department, less time is needed for update of any training manuals, lowers external advisory fees.
  • The Taxmarc™ Tax Code solution has a break-even point within twelve months.”

Tax Code Solution front

For drafting and supporting a business case the following information could be used.

EU VAT Rate Changes

In many countries around the world the VAT revenues make up an important part of the total revenues of the government. Combined with the financial crisis and the need to reduce the budget deficits, VAT rates are changed frequently. The average EU standard VAT rate increased from around 19.5% to more than 21%. Raising VAT rates is not limited to Europe.

Europe has seen changes in 11 countries in the period 2007 – October 1, 2013 and the following increases are expected:

  • Cyprus will raise VAT 2% to 19% by 2014
  • France Will raise its standard VAT rate from 19.6% to 20% in 2014
  • Luxembourg will raise VAT from 15% in Jan 2015

The change of a VAT rate has a huge impact on the ERP system. Due to design limitations in SAP for every new VAT rate, new tax codes must be set up in standard SAP and a significant amount of additional changes are required to get the new tax codes up and running for all SAP transactions. This usually entails significant projects that include the adjustment of many tables in SAP.

A non-exhaustive overview of activities can be found in our checklist for VAT rate changes in SAP

What have your peers experienced?

Quotes from HMRC Compliance Costs and Commercial Impact of December 2008 VAT Rate Change:

“[the system changes] was a big one, yes, for our retail arm of the business where we do more standard-rate, if we had to have a new rate input into the system or a new VAT code … I know there was a working party set up for it and the changes had to be done, but I wouldn’t know how much time was spent on it, but it was quite big, it was understanding how to change it in the system and then obviously conveying that across to everybody so that they started using the correct code for the correct transaction.”

“Sitting down with a VAT manager and listing every system and process that we thought was impacted, we then got together with our IT people and we had to set up a SharePoint site in order to be able to monitor all the different changes, because there were a lot …”

“A VAT rate change affects a huge number of people in a organisation – you have the main Tax Teams, who are subject matter experts, you have to understand the rules and understand the changes and direct what change is going to be made; you have the Documentation Teams that are required to make sure that invoices go out with the right VAT rates on; you have the system changes that need to be made, and many of those systems are quite diverse; many members will have several systems for example, not just one, that they are managing, so you have to make changes across multiple systems.”

SAP checklist for VAT rate change

Numerous multinational companies use very many different tax codes and risk facing a “shortage” of necessary tax codes. Companies face bottlenecks with SAP‘s 2 character tax codes and the many necessary modifications in SAP in the event of VAT rate changes.

It seems therefore a straightforward matter, however in practice a considerable amount of activities are required to get this properly implemented in SAP.

The reason is that VAT codes in SAP are not set-up with validity dates and therefore for every VAT rate change a new VAT code has to be created. Due to the complexity in SAP, the creation of a new code is just the starting point to get SAP up and running.

Below you find a non-exhaustive list of required activities in case of VAT rate changes. It depends on the current configuration of VAT functionality whether all activities listed below are required. The opposite is also possible that more activities are necessary.

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