Why is VAT Structure and Configuration important?

March, 2018 No Comments News

The structure and configuration of an ERP system is generally done at the time of implementation of the system, and generally involves an ERP specialist furiously attacking his keyboard to ensure minimal interruption to business processes.

The system goes live!

Business rejoices as the process went by pretty smoothly with relatively minor stumbling blocks along the way.

But does this now mean your system is ready to accurately process your VAT on your daily transactions?

Let’s look into what aspects needs to be covered for a sound VAT configuration:

  • Ensuring your VAT entities are appropriately setup;
  • Tax codes are correctly allocated; and
  • Management of accurate and complete vendor master data

Most entities will configure their ERP system into manageable chunks and not necessarily VAT entities. As a result, many company codes within an ERP system could relate to one VAT entity. Or vice versa. Imagine the poor tax manager who needs to keep track of which company code relates to which VAT legal entity in a large organization.

ERP systems have standard VAT codes applicable to a specific country, which means the ERP specialist can select the relevant country suite when setting up your environment. This does not mean that additional tax codes cannot be added. Allocating these tax codes to general ledger accounts is usually done at the discretion of the ERP specialist, with minimal involvement (if any!) from a tax or financial manager. Furthermore, the tax manager also may not be aware of the amount and types of active tax codes within the system.

Another aspect of configuring an ERP system which is becoming more and more important from a VAT perspective, is the vendor master data management.  It is important to maintain accurate and complete vendor information, specifically vendor VAT information, as this directly impacts your ability to claim input tax and as a result has an implied cash flow effect. On the other hand, it is all well and good to have complete data, but is it in fact accurate?

The above all has an impact on the detailed processing of transactions on a daily basis, which is what your tax return information is based on. An unsound environment could lead to:

  • Incorrect tax codes used
  • Incorrect companies assigned to the VAT entity registration number
  • Invalid VAT numbers captured for vendors

Having a sound base, in this case a well configured VAT ERP environment will enable the correct processing of VAT throughout your daily activities. Battle one won!

Now to ensure VAT rules are applied correctly. The war continues…

About The Author

Farnaaz Gaffoor

Product Manager

Farnaaz is a qualified chartered accountant with working experience that includes external auditing, internal auditing, forensic investigations as well as fraud risk management. During her articles she gained experience in the retail, manufacturing and reinsurance industries, specialising in private company services.