We know that taxes aren't your finance teams' favorite thing, but handling them could be more manageable, at least. Here's a quick summary of why they are essential and the most common mistakes to look out for.
Value-added tax (VAT) is a consumption tax that generally applies to all goods and services bought and sold for use or consumption in the country of business operations. VAT in Europe accounts for about one-fifth of the total tax revenue in the region. After talking to one of our tax expert partners recently, we learned that many companies that start operations in the EU and the UK have issues managing this tax, as back in their home countries, such as India and China, there’s a lack of VAT enforcement.
Moreover, the European Commission publishes a study on the VAT Gap every year, examining the overall difference between the expected VAT revenue and the amount actually collected. In the latest data from 2019, the VAT Gap was €134 billion, equating to a total revenue loss of 10.3% across the EU. Big part of this VAT Gap comes from the digital economy.
In Germany, Jamison Money Farmer PC mentions that under German VAT law, sometimes VAT might be triggered by some company's operations even if the domestic fixed business place information is missing. CEO and CFO's operating in Germany need access to a good tax consultant to eliminate any misunderstanding.
In Spain, the VAT system is one of the most cumbersome in the region, with several types and many exemptions that are hard to keep up with. Data shows that Spain could collect the same amount of VAT revenue with a single rate of 10% compared to the current system, which maintains a general rate of 21%.
In the UK, Accountex mentions that small businesses spend more than 86 minutes reviewing the VAT returns numbers. And 51% of these business owners have made mistakes. To prevent VAT errors, you should look into HMRC approved accounting software like Xero and Quickbooks that have dedicated VAT packages. Payhawk has direct integration with both of these accounting software packages. These integrations mean that your VAT accounting, payments and expenses, spend controls and visibility all feel like one seamless experience: Read more here.
Some common VAT mistakes include:
- Mixing up VAT rates. Countries in the EU have a standard VAT rate of at least 15% (by law) and a reduced rate of at least 5%. However, actual rates applied vary between EU countries and between certain types of products. The European Commission recommends looking into national VAT authorities to understand the exact VAT rate.
- VAT calculation mistakes. It's all very different. As we mentioned above, countries have different VAT rates, and invoices may also have different lines with different types of VAT.
- Currency conversion mistakes. Companies with several currencies, who operate in different markets, should keep a record in the payment currency and only exchange it once, for example, on the last day of the quarter.
- Incorrect location of the buyer. Sometimes the billing address or delivery address differs from the information in the invoice. Check several pieces of supplier information to avoid mistakes.
- Not seeking help. VAT is not easy to get your head around, so we recommend working with local tax accountants. This partnership will alleviate your tax headache and prevent VAT authority's fines.
Corporation income tax
In Europe, companies are obliged to pay income tax on their profits. Corporation tax is one of the most polarizing topics among economists and business owners. Some believe that corporation tax is a distortive tax and should be kept to a minimum, or even zero. On the other hand, others believe that companies are not paying their share and are profiting from the country's infrastructure, goods, and services for free.
The Tax foundation mentions that corporate income tax rates have been declining worldwide for the last two decades. In Europe specifically, the average tax rate has declined from 22.8% in 2018 to 21.8% in 2021. However, the OECD underlines that even though rates have decreased during the latest years, the revenue has actually increased as countries have broadened their tax base. From 2000 to 2016, corporation tax take of GDP rose from 2.7% to 3% of GDP.
What's clear is that corporate tax avoidance is a big deal and could cost business owners big time in penalty fees. It's estimated that Europe loses between $40 billion and $85 billion in corporate tax avoidance every year.
Some common corporate income tax mistakes are as follows:
- Submitting and/or paying late. There are penalties for both submitting late and paying your corporation tax late
- Not keeping up with corporation tax reforms
- Not seeking help on time when making a mistake in filing in the corporate tax
- Registering with the tax authorities late
- Misreporting/overreporting income
- Incorrect calculations of deductions
Taxes are complicated, but thanks to the digitization of company processes like bookkeeping and expenses, it's easier and quicker to complete this task. At Payhawk, we help companies gather the VAT information they need for invoice reconciliation via their invoices. We do this with our OCR in more than 60 languages, making it simple for each user to upload invoices with very little additional data entry. All of the information is then pushed to their bookkeepers, which further streamlines the process. Want to know how we can help your business with this? Book a demo today.