Managing VAT to boost profit

JAMES PRINCE, an indirect tax director at KPMG, outlines how effectively managing VAT can make a difference to the bottom line of a business

HAVE you heard the story about the airline that was looking to cut costs? It was advised to remove one olive from each of its meals.

That one olive, multiplied by hundreds of meals per flight, multiplied by thousands of flights, over several years, added up to a few million pounds saved in fuel costs.

This story exemplifies the type of micro changes that can make huge differences to bottom lines, and managing VAT can do the same. Many governments are reassessing their long-term tax policies and turning to indirect taxes, particularly VAT, and keeping pace with these changes and actively managing VAT should now be a key objective for all businesses.

A recent KPMG study of organisations across 27 countries found that despite the global shift towards indirect tax, VAT remained under-resourced, under-measured and under-managed in many businesses.

However, there is a growing realisation that effectively managing the indirect tax function can add to the bottom line of the enterprise.

Basic measures, such as enhancing VAT cash flow or reducing the amount of unrecovered VAT, can contribute to the profitability of a business. Similarly, reducing the overall costs of compliance helps deliver a competitive advantage in the marketplace.

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In order to achieve this, businesses should consider the following:

n Analyse market impacts – Changes in VAT treatment can substantially alter the market dynamics for a product or service. Modelling the impact on pricing, demand and profitability will enable the business to make more informed commercial decisions;

n Automation – Enhanced automation of VAT processes can enable a business to more effectively manage emerging changes and new complexities. This can be achieved through a combination of embedding VAT decisions into the system, implementing appropriate tax engines and utilising additional software tools to assist with the preparation, review and reporting of VAT; and

n Turn knowledge to value – As the cost of missing a significant VAT change (such as a rate change) could be enormous, putting in place a robust system to identify changes early and implement them in time is vital.

Finally, for most companies, VAT is the third largest cash flow after sales and the cost of sales and it needs to be approached like any other cash asset, especially now that the standard rate is at 20%.

Put simply, if you pay money to HM Revenue & Customs before you collect it from your customers then you will have an additional funding issue to deal with. Improving your position in this respect means a significant opportunity to create value, improve cash flow and enhance profit.