50 years on, VAT continues to create confusion for UK businesses
Overall, most UK businesses (71%) agree that VAT requirements and processes are too complex and confusing. From VAT registrations to calculations to returns and reporting, UK businesses find the entire VAT process to be challenging and layered with complexity. Furthermore, only half (51%) of businesses said they would be confident in their ability to explain some elements of their VAT obligations.
Because of this perceived complexity, it probably comes as no surprise that 46% of businesses are spending anywhere from 10 to 40 hours per month managing VAT compliance, including checking transactions, doing VAT returns, and researching different tax laws.
When looking at specific business sizes, it’s midsize businesses that spend the most time on VAT compliance with 72% spending six to 20 hours per month managing VAT. Similarly, the same percentage of businesses in the finance industry reported spending six to 20 hours per month on VAT management. Sixty-nine percent of IT and telecoms businesses and 68% of HR businesses also spend six to 20 hours per month.
Another result of complexity is evident in the impact on businesses that have filed inaccurate or late VAT returns. VAT returns detail a business’s transactions and applicable taxes, and calculate what they owe or what will be refunded. Filing VAT can be a tedious endeavor. It requires you to keep meticulous records that include receipts of all your purchases and invoices that contain VAT. As such, nearly a quarter (24%) of UK businesses have been audited for filing their VAT return inaccurately or late, and 20% have accidentally overpaid on their VAT return.
According to the survey, one of the most common impacts of filing inaccurate or late VAT returns is an audit. From sales, marketing, and media, 35% of businesses reported being audited and from the HR industry, 33% of businesses reported being audited.
Businesses are turning to technology to combat complexity
Nearly three-quarters (71%) of respondents indicated that they have invested in technology to streamline VAT calculations and reporting. When asked about which part of the VAT management process businesses have invested in technology to address, respondents answered as follows:
- 46% and 43% have invested in technology for the filing and preparation of VAT returns, respectively
- 42% have invested in technology to address real-time reporting requirements
- 40% have invested in technology for data validation
- 23% have invested in technology for VAT determination
The need for technology to manage VAT in the UK has never been greater. Under His Majesty’s Revenue & Customs’ (HMRC) Making Tax Digital (MTD) initiative, which went into effect in November 2022, businesses must comply with digital record requirements, prepare VAT returns using digital links and file VAT returns using software via an API link.
Avalara helps businesses across the UK and around the world manage VAT compliance.