Optimising cash taxes in the face of rising costs

Eloise: We're here today to talk about cash taxes. Obviously, we've been operating in a high inflationary environment for a while. Interest rates have remained high and the recent Budget obviously increasing cost for business as well, most notably the rises in National Insurance.

It is going to cost more to employ people post the Budget than it did before. So, all of these factors coming together, businesses thinking about how they maximise cash, and tax being one of the key levers, one of the key areas that they can look at in terms of optimising that.

What does that mean for the area of tax that you specialise in?

Andrew: So, I work in indirect taxes, which are taxes on transactions, and obviously businesses have loads of transactions. So, many transactions around everything they buy and everything they sell is a transaction on which indirect taxes are generally levied.

The most common ones being customs duties, which are taxes on goods moving across borders, and then VAT. And optimisation really means kind of getting the right amount of tax paid on those transactions. If i think about customs, you know, businesses haven't looked at their duty rates over a number of years in many cases because they just want to get the goods into a country.

And on VAT, they haven't been able to unlock the data that enables them to optimise the position for VAT recovery or ensuring that VAT isn't overpaid on their sales.

So, taking a prudent position on millions and millions of lines of data in some cases, so, even small amounts of optimisation, basically getting the tax treatment correct, can make a huge difference. But the data is the key to unlocking that, which is where you're involved, Lavinia.

Lavinia: Yeah, absolutely. So, I work in tax transformation and my focus with regards to cash taxes is really minimising tax leakage through improvement of data, source system, data capture, master data capture, transactional data capture, improved processes, systems as well.

So, there’s lots of opportunity to either optimise your compliance processes, look at improving the way that your data is analysed and the filing is validated, all ultimately improving the cash position through more accurate compliance.

Eloise: So, in terms of sort of immediate actions, what can clients really do now, Terry, to take advantage of that?

Terri: Put simply, it's thinking about what they've been doing for the past couple of years. So, how have they been spending their time and what have they been spending their money on? Have they been investing in launching a new product, for example, which is more sustainable, if they're looking at how, from a life sciences perspective, new therapeutic uses for a particular device? These are areas where R&D incentives or patent box might be relevant.

Similarly, if they're going through a big ERP or finance transformation, again, these are both incentives from an R&D perspective that could qualify. You've also got where businesses are investing more significantly in infrastructure, so they're perhaps launching a new site or they're looking at an office refit. Really thinking about the breadth of capital allowances in this case is key because all these reliefs will drive value. So, making sure that you're looking at the full scope and breadth of them to really drive the cash value from those reliefs.

Andrew: Yeah, for indirect taxes, I'd say right now don't leave cash on the table. So, there's been a period of time when businesses were over prudent understandably because they expected HMRC scrutiny and there's an increasing amount of that. And so, they didn't want to push the boundaries of what VAT they could claim or make sure that they weren't overpaying.

The ability to look at data means that we can get that right and get it right now but also retrospectively. So, there's a four-year period we can go back and look at where VAT might not have been optimised.

And similarly with customs duties, so, there's a number of my clients who just haven't looked at their duty rates, commodity codes for a number of years actually, and there's actually an alarming amount of high street retailers who, if you look at their commodity codes that they're using for imports, appear to be importing parts for nuclear reactors, which is a bit alarming. I'm sure that's because they just haven't looked at their commodity codes for a number of years. So, look at those on the customs side for anybody who's importing and exporting.

And then for the VAT side, looking through lines and lines of data I would say kind of six months ago was kind of nice to do, but the ability to leverage data and all the cost pressures you talked about, Eloise, mean that it's a must do now.

The other week I was working with a client and we unlocked two and a half million pounds of VAT which has just been systematically underclaimed because they put their system in incorrectly. So, £2.5 million of VAT on a £10 billion spend going back over a number of years, that's lines and lines, millions of lines of data. But we were able to unlock that relatively simply and make sure that that £2.5 million just hit the bottom line.

I would say, look at the position now and look at it retrospectively because that might then fund improvements going forward as well.

Lavinia: I would really corroborate what Andy and Terry have been saying. And picking up on the key points, if your organisation is going through a finance transformation or an ERP transformation, it's really a great opportunity to get your master data and transactional data capture right at source and the tax rules set up within the system as well, to really optimise that recovery from day one.

Of course, you can look historically as well, but really optimising the day-to-day recovery is a key example of optimising your cash tax position using systems, data and processes. So, it sounds like some really great points and great experiences there in terms of looking backwards at the historic position and maximising cash opportunities there.

Eloise: How about going forward, like maintaining that and securing it for the future?

Lavinia: So, once you've identified what the potential issues are, you can then automate checks on the data or embed controls within your system or even offline to make sure that the same errors are not repeated going forward. So, already in real time, you're making sure you're optimising that recovery position with the increased trend towards e-invoicing and e-reporting.

The onus is really on the taxpayer to get that data right at source, as opposed to after the fact, going forward. However, even without an ERP transformation or finance transformation within the tax function itself, you can optimise your compliance processes, analyse your data, validate how your tax filings are done, also to improve your cash position.

And with clear audit trails and embedded controls you're improving your position and your ability to deal with that additional scrutiny and ultimately ensure more accurate compliance and ultimately improve your cash position.

 Andrew: Yeah, I mean, I would build on that in terms of kind of going forward, use the learning that you take from the retrospective position in the example I gave earlier, to embed that going forward. Many clients are saying okay, fine, we've looked at the retrospective position but it still takes us days and days of time with a number of people pulling together the data and the reporting that's required for a VAT return.

So, there are efficiencies that can be driven by the data, and then it frees up people, it makes the whole process more efficient, but it also frees up people to do more value-added work around the analysis. And typically, if I'm thinking about a VAT return, things like, all staff expenses being correctly treated so that I'm recovering VAT? How many invoices have I double-counted so that perhaps I'm accounting for VAT twice? All those checks can be done. We do them on our client's data

And we can just embed those and make sure that it's an efficient process, less time consuming, more value add going forward.

Terri: Yeah, I would just echo that as well.

With better data, ultimately you get a better outcome because it's more robust, it's more granular and in the climate that we're in, from an incentives perspective particularly, there is a lot of scrutiny on R&D incentives claims particularly, but for the others as well, it's the direction of travel. Data is so critical and it can make it more efficient from a process perspective, but it gives a lot of comfort then to organisations that they can present a robust position and also optimise because they can go dig into that data in a bit more detail, but also protecting the position with the tax authorities.

And for me as well, the other point is just not being afraid to ask the question. So, thinking about if you have had a methodology that's been consistent for a number of years, by digging into the data gives you a chance to kick the tyres and think about is this actually fit for purpose? Is there something we could do differently? And that might unlock further value and help to set up a more efficient process in the future as well.

Eloise: Excellent. Thank you.

So, some great points coming out there around that historic position and the look forward in terms of understanding what's going on in the business, what your methodologies are, and really key, what the data is.

So, thank you very much for sharing all of those with us today.