Risky Proposition: How VAT Impacts Companies’ Financial Results and Reputation

In theory, VAT collection should be a neutral event for companies, since the tax is born and paid for by the consumer. However, with a significant value of taxes passing through your company, VAT can be a major liability if it is not claimed, collected and settled properly.

Companies often view VAT as nothing more than an administrative task. What they often fail to consider is how much VAT is running through the company at any given time and the real financial impact if there are inaccuracies or mistakes in VAT filings. Once they realize the risk that VAT poses to the bottom line and the company’s reputation, ensuring full compliance should become an essential priority.

The measurement of the VAT at risk within an organization is called “throughput.” EY defines VAT throughput as “VAT/GST on gross turnover and taxable. It combines input tax and output tax (rather than netting them off as is done for calculating VAT/GST payable), and it includes notional standard rate VAT/GST for exports and exempt or reduced-rated sales – as those non-taxable treatments must be proved.”

The amount of VAT floating through an organization at any one time can be sizable. On average, this throughput totals about 20 percent of sales and purchases combined, meaning global businesses are managing billions of dollars of VAT every day.

With so much VAT at stake, companies are open to significant liabilities if they are not in complete compliance with VAT regulations. If done incorrectly, companies must bear the cost of these inaccuracies – taking throughput from an administrative task to a hard cost. Errors and penalties assessed for non-compliance will eat away at margins, impacting P&L and EBITA, which in turn will harm a company’s reputation amongst shareholders and the public.

With technology-driven VAT regulations, government tax authorities worldwide are improving their ability to audit for inconsistencies – whether accidental errors or intentional attempts to evade taxes. As a result, errors will undoubtedly be discovered – more quickly than in the past – increasing the likelihood that non-complying companies will be assessed penalties or fines and suffer harm to their reputation.

The reputational risk compounds with each error, as authorities audit companies more frequently once they are found in noncompliance. These audits not only can result in financial penalties, but the mere audit process is a resource-intensive cost. As these costs build, stakeholder confidence falters.