Digitally transforming indirect tax operations is currently a topic of discussion amongst industry leaders. One thing that these leaders are struggling with is whether to choose:
- An end-to-end technological solution for their indirect tax journey
- Or hire a group of experts to look after their VAT management
They must consider that a fully automated journey has many business benefits. First and foremost is, automation saves experts from wasting their time on repetitive manual tasks. In addition, it keeps the businesses away from irregularities and risks that can harm their businesses at the later stages.
Keeping such beneficial scenarios in mind, let us discuss some prominent but individual scenarios of VAT where technology can serve the better approach to the business.
Impact of VAT Registration Number (VRN) check process on business
As per a recent study, the global vendor management software market is poised to grow by USD 3.96 bn during 2020-2024.
Whether it is about vendor management or customer onboarding, the due diligence processes are gaining popularity. All businesses are expected to set a process to know their suppliers and customers and, in that process, one of the prominent factors to be considered is checking the authenticity of the VAT registration number (VRN) of the party involved. VRN check process also attracts statutory requirements in terms of decision making for a particular transaction viz., zero-rating conditions, availing input tax for supplier’s invoices, etc.
It would be amazingly simple when questioned about the validation of a single VAT registration number (VRN). For EU businesses including Northern Ireland post Brexit, one can use the VIES VAT number validation service by accessing European Commission’s portal. For UK businesses, one can use UK’s HMRC platform to validate VRN for businesses.
Complexities with VRN check process in an organization
The VRN check process includes various concerns that require attention. Some of them are:
- Checking thousands of VRNs each day manually
- How can errors be tackled in bulk?
- Within the business, whose responsibility should it be to check VRNs? The procurement team or accounts team.
- If it is the procurement team, is it in line with the statutory compliance requirement?
- Capturing the proof of VRN status along with the audit logs.
Why it is important for businesses to check and track VRN check process for their vendors?
The primary reason for validating VRNs is if unchecked, it can cause monetary losses to the business.
A business can reclaim the input VAT if only it has a valid VAT invoice from the supplier. Also, an invoice is considered valid if only it contains a valid VRN.
Even for invoices of reverse charge transactions such as Intra EU Supply, it is mandatory for businesses to record output tax. In addition, a business can reclaim the same only if it has a valid VAT invoice containing valid VRN from the supplier.
Same way, a business can zero-rate the Intra EU supply only if they have a valid VAT number of the buyer in EU member countries.
Thus, it becomes prominent for an organization to adopt a technology that can help them to comply with the VRN validation process.
How often should VRNs checked?
There are no pre-defined rules. It varies from business to business and mainly depends on:
- Volume of transactions
- Nature and size of the business
- Number of vendors or customers that the business deals with
Validating VRNs is recommended when a new supplier or customer is added and thereafter when transactions are posted.
Technological Solution is the resort
Businesses dealing with millions of transactions every day should not rely on manual intervention for VRN checks as it is a time-consuming task, and it may introduce errors and inaccuracy within the system. The tax professionals have been submitting checks through the EU’s VIES or free online tools but the problem they face is limited data is validated and there is no proof of the VRN check for every number (for audit purposes) are recorded.
Therefore, businesses need to integrate technological solutions to their source system in which a web service interface can validate the vendor-customer masters in a batch mode. It will enable real-time validation of VRN along with audit logs and offer proof of validation each time when posting any transaction to the books.
Such automation service will help businesses to clean their vendor-customer masters by analysing the output from VIES in terms of format check, whether VRN is valid or invalid, organization name and address match, etc.