The end of the year is always a good time for reflection, not only analyzing numbers but also searching for SaaS tools that can help the business be more digitized and agile. In our ebook CFO tips for closing the year, we talked about making the year-closing process more manageable. We also mentioned some of the most common mistakes made with general accounts, expenses, and taxes
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.
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.
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 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.
Whether you have tens, hundreds, or thousands of employees, we’re making your business spend work for you, giving you control over spending at scale with a single solution. Say goodbye to tedious finance tasks, and schedule a demo with us today.