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Getting ready for VAT digitisation: automation is key

Source: Finance Derivative

hristiaan Van Der Valk, Vice President for Strategy and Regulatory at Sovos, says technology will power real strategic success for companies required to follow continuous transaction controls (CTCs).

A growing number of governments and businesses around the world are adopting digital-first approaches for a multitude of processes, resulting in a need to move away from traditional paper-based invoicing and embrace real-time tax reporting. This trend has been largely led by Latin American countries such as Brazil, Chile and Mexico. Through adopting real-time reporting via electronic invoicing systems, they have been able to better understand their economies, reduce fraud, and close VAT gaps.

The shift to continuous transaction controls (CTCs) allows transaction data to be automatically streamed to governments, reducing the need for resource-intensive business systems and document audits for tax administrations. Through the use of rich, standardised data, tax authorities are able to compute a business’s tax liability. Businesses are generally not required to be heavily involved in this process.

With this requirement – combined with invoicing – businesses would be able to avoid filing periodic tax returns, relieving them of the burden of running VAT compliance teams and filing reports that bring no benefit. The practice, however, calls for a more comprehensive data management approach and proactive data reconciliation across different sources of government-controlled transaction data. For this reason, companies need access to a high-quality dataset in case they must challenge government-determined tax liability.

It can be problematic to have poor data quality in a VAT environment that relies heavily on legacy reporting. For example, there have been instances in which reports were inconsistent or didn’t correspond to accounting data in audits. Consequently, fines or penalties may be imposed. However, in the world of CTCs the consequences of data quality issues are of a very different magnitude. Your financial and physical supply and demand chains can practically grind to a standstill if your data isn’t approved by the tax administration – especially in nations where the tax administration ‘clears’ the invoice in real-time such as in Italy, Mexico and Brazil.

Many businesses with responsibilities in VAT jurisdictions are missing something important here. Beginning to utilise automation and other more specialised tools for producing VAT returns is a critical step toward harnessing the benefits from the mandated transition to CTCs as opposed to focusing on the challenges.

Manual is outdated

A lot of businesses are still using manual processes like spreadsheets to manage their VAT compliance, which essentially involves the time-consuming production and submission of VAT returns.

Through implementing technology like automated rules in software, companies can maximise the validity of VAT data. As well as simplifying and re-risking VAT reporting activities, the effort required to design the steps to enhance data using automated rules engines means establishing structured definitions of ‘what’s wrong with your transaction data?’ These definitions can then be used to identify the cause of quality concerns in upstream business processes and address them in order to dramatically improve CTC readiness.

For many businesses, the majority of quality concerns are down to the manual and paper-based processes used in internal workflows and trading partner relationships. Therefore, automation will play a vital role in properly preparing for CTCs.

Preparing data in this manner for VAT enforcement means that a business is paving the way for a more data-driven approach to compliance in general. Companies will increasingly be required to coordinate data being submitted to tax administrations automatically from a range of business process and accounting systems, once CTCs and other VAT digitisation initiatives become operational.

Keeping up to date with the expanding scope of information that is handed over to tax administrations in these automated data transmissions is crucial, so that companies can maintain a level of control over the image of their business operations that is constructed for the tax authorities.

As well as this, a business may benefit from this insight across data encompassing the full supply chain and transactions.  For instance, this information gathered could be turned into tactics to help with strategic planning.

Business leaders may reduce expenses, boost resilience, and improve controls by automating tax and business operations and adopting a data-driven approach to compliance, allowing for a more accurate and detailed understanding of granular reporting needs.

Organisations should prioritise the building of dashboards utilising modern analytics tools to prepare for this huge transition. It’s also important to have a well-organised evidence base with clean digital archives. Technology and the insight it brings will be the driving factor for real strategic success as economies recover from the pandemic.

Data flow is key

As tax authorities and governments work to reduce VAT gaps, greater visibility into corporate databases is at the top of their agenda. This is accomplished through the government’s digitisation of all tax reporting, in which data is delivered at regular intervals that correspond to the flow of transactions and the government’s data requirements.

It is imperative that transaction data, relevant primarily for VAT purposes (though not exclusively), be received in a transactional manner. Meanwhile, other types of information, like payment data or inventory movement, may be requested on a weekly or monthly basis, whereas broader accounting data might be requested more frequently.

The introduction of CTCs should not be viewed as an IT formality, but as the first step in tax administrations gaining easy, timely and effective access to source data. The digitisation of tax will enable administrations to access data on a regular basis, as well as at a granular level.

As companies transition from manual data entry into this new world of automated data exchange, they should concentrate on why this change is important rather than how it is happening. The real prize here is not getting the ‘plumbing’ to work according to government specifications; focusing on this ‘how’ question means that companies may be missing out on a potentially critical business enabler, but equally they may be inadvertently setting themselves up for much higher levels of compliance risk.

With the introduction of CTCs and various forms of detailed digital reporting, companies should be prepared to be exposed to much more stringent audits. The reason for this is that data quality or consistency issues will gradually become more transparent to tax administration teams, which will increasingly be enabled to respond to even the smallest inconsistencies that may previously have gone under the radar with surgical precision.

The higher level of visibility allows tax authorities to cross-check more company data, its trading partners and third parties’ data. These abilities will be vastly improved as more governments complement CTC requirements with mandates for SAF-T and similar electronic auditing requirements. Through thorough analysis of this growing mass of real-time and historic data, a firm’s operations can be fully understood.

Successfully adapting to CTCs means investing in the journey rather than the destination. As everything becomes more digitised, organisations must stay on top of these changes and maintain the same level of data insights as tax authorities do. There will be a growing need for this as more countries introduce CTC regimes (both France and Germany are on the horizon).

Adapting business tools to deliver better data insights is essential to facilitating tax digitisation, both to satisfy global tax authorities and to achieve a competitive advantage in the market. In short, companies should remain fully alert and prepared to ensure a smooth transition and successful outcome of CTCs, which are the logical next step on the road to business transparency.

The domino effect of CTCs

The willingness of autonomous governments to accept digital tax reporting will determine how widespread its implementation becomes. Following more than a decade of success with these methods in Latin America, governments all over Europe, for example, have made major moves toward introducing CTCs. In doing so, there is a great deal of preparation that international companies need to do which can take a considerable amount of time and resources.

In all jurisdictions with indirect tax systems, moving toward increasingly digitised tax controls is the only path. With real-time data, governments can better understand and analyse their country’s economic health, while also enhancing fiscal controls and reducing fraud. It’s just a matter of time until these digital programmes become standard practice on a global level, as countries all across the world begin to recognise their success in reducing fraud, increasing efficiency and closing VAT gaps.

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Business

Empowering banks to protect consumers: The impact of the APP Fraud mandate

Source: Finance Derivative

Thara Brooks, Market Specialist, Fraud, Financial Crime & Compliance at FIS

On the 7th October last year, the APP (Authorised Push Payment) fraud reimbursement mandate came into effect in the UK. The mandate aims to protect consumers, but it has already come under immense scrutiny, receiving both support and criticism from all market sectors. But what does it mean for banks and their customers?

Fraud has become a growing concern for the UK banking system and its consumers. According to the ICAEW, the total value of UK fraud stood at £2.3bn in 2023, a 104% increase since 2022, with estimates that the evolution of AI will lead to even bigger challenges. As the IMF points out, greater digitalisation brings greater vulnerabilities, at a time when half of UK consumers are already “obsessed” with checking their banking apps and balances.

These concerns have contributed to the implementation of the PSR’s (Payment Systems Regulator) APP fraud mandate, which was implemented to reimburse the victims of APP fraud. APP fraud occurs when somebody is tricked into authorising a payment from their own bank account. Unlike more traditional fraud, such as payments made from a stolen bank card, APP fraud previously fell outside the scope of conventional fraud protection, as the transaction is technically “authorised” by the victim.

The £85,000 Debate: A controversial adjustment

The regulatory framework for the APP fraud mandate was initially introduced in May 2022. The maximum level of mandatory reimbursement was originally set at £415,000 per claim. The PSR significantly reduced the maximum reimbursement value to £85,000 when the mandate came into effect, however, causing widespread controversy.

According to the PSR, the updated cap will see over 99% of claims (by volume) being covered, with an October review highlighting just 18 instances of people being scammed for more than £415,000, and 411 instances of more than £85,000, from a total of over 250,000 cases throughout 2023. “Almost all high value scams are made up of multiple smaller transactions,” the PSR explains, “reducing the effectiveness of transaction limits as a tool to manage exposure.”

The reduced cap makes a big difference on multiple levels. For financial institutions and payment service providers (PSPs), the lower limit means they’re less exposed to high-value claims. The reduced exposure to unlimited high-value claims has the potential to lower compliance and operational costs, while the £85,000 cap aligns with the Financial Services Compensation Scheme (FSCS) threshold, creating broader consistency across financial redress schemes.

There are naturally downsides to the lower limit, with critics highlighting significant financial shortfalls for victims of high-value fraud. The lower cap may reduce public confidence in the financial system’s ability to protect against fraud, particularly for those handling large sums of money, while small businesses, many of which often deal with large transaction amounts, may find the cap insufficient to cover losses.

The impact on PSPs and their customers

With PSPs responsible for APP fraud reimbursement, institutions need to take the next step when it comes to fraud detection and prevention to minimise exposure to claims within the £85,000 cap. Customers of all types are likely to benefit from more robust security as a result.

The Financial Conduct Authority’s (FCA’s) recommendations include strengthening controls during onboarding, improving transaction monitoring to detect suspicious activity, and optimising reporting mechanisms to enable swift action. Such controls are largely in line with the PSR’s own recommendations, with the institution setting out a number of steps in its final policy statement in December 2023 to mitigate APP scam risks.

These include setting appropriate transaction limits, improving ‘know your customer’ controls, strengthening transaction-monitoring systems and stopping or freezing payments that PSPs consider to be suspicious for further investigation.

All these measures will invariably improve consumer experience, increasing customers’ confidence to transact online safely, as well as giving them peace of mind with quicker reimbursement in case things go awry.

Going beyond the APP fraud mandate

If the PSR’s mandate can steer financial institutions towards implementing more robust security practices, it can only be a good thing. It’s not the only tool that’s shaping the financial security landscape, however.

In October 2024, the UK government introduced new legislation granting banks enhanced powers to combat fraud. An optional £100 excess on fraud claims has been introduced to encourage customer caution and combat moral hazards, while the Treasury has strengthened prevention measures by handing out new powers to high street banks to delay and investigate payments suspected of being fraudulent by 3 days. The extended processing time for suspicious payments may lead to delays in legitimate transactions, making transparent communication and robust safeguards essential to maintain consumer trust.

Further collaborative efforts, such as Meta’s partnership with UK banks through the Fraud Intelligence Reciprocal Exchange (FIRE) program, can also aid the fight against fraud. Thanks to direct intelligence sharing between financial institutions and the world’s biggest social media platform, FIRE enhances the detection and removal of fraudulent accounts across platforms such as Facebook and Instagram, not only disrupting scam operations, but also fostering a safer digital environment for users. The early stages of the pilot have led to action against thousands of scammer-operated accounts, with approximately 20,000 accounts removed based on shared data.

Additionally, education and awareness are crucial measures to protect consumers against APP fraud. Several high street banks have upgraded their banking channels to share timely content about the signs of potential scams, with increased public awareness helping consumers identify and avoid fraudulent schemes.

Improvements in policing strategies are also significantly contributing to the mitigation of APP fraud. Specialized fraud units within police forces have enhanced the precision and efficiency of investigations. The City of London Police and the National Fraud Intelligence Bureau are upgrading the technology for Action Fraud, providing victims with a more accessible and customer-friendly service. Collaborative efforts among police, banks, and telecommunications firms, exemplified by the work of the Dedicated Card and Payment Crime Unit (DCPCU), have enabled the swift exchange of information, facilitating the prompt apprehension of scammers.

How AI is expected to change the landscape

The coming months will be critical in assessing these changes, as institutions, businesses and the UK government work together to shape security against fraud in the ever-changing world of finance.

While fraud is a terrifyingly big business, it’s only likely to increase with the evolution of AI, making it even more critical that such changes are effective. According to PwC, “There is a real risk that hard-fought improvements in fraud defences could be undone if the right measures are not put in place to defend against fraud in an AI-enabled world.”

Chatbots can be used as part of phishing scams, for example, and AI systems can already read text and reproduce sampled voices, making it possible to send messages from “relatives” whose voices have been spoofed in a similar manner to deepfakes.

Along with other innovations, tools and collaborations, however, the APP fraud mandate, UK legislation and FIRE can all contribute towards redressing such technological advances. Together, this can give financial institutions a much-needed boost in the fight against fraud, providing a more secure future for customers.

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Business

After the tax deadline: Next steps for accountancy firms

Source: Finance Derivative

By Cameron Ford, UK General Manager of Silverfin

For many accountancy firms, tax season has ended. Now, leaders have a chance to reflect on their firm’s performance, how their people are feeling after the busiest period of the year, and consider how they might optimise people, processes and technology for the future.

As a former CFO with experience in senior accountancy roles across multiple firms, I know first-hand the challenges the year-end crunch presents. The intense weeks and months leading up to HMRC deadlines put immense pressure on infrastructure, exposing the limitations of legacy systems and the bottlenecks caused by manual workflows.

The post-busy-season presents a valuable opportunity to reassess and prepare for the next one. It’s also a time for firms to reflect on evolving client needs and proactively take action to deliver improved future outcomes. Firms should also evaluate whether their current technology is alleviating pressure during peak periods – or adding to the strain.

The risk of inaction

We are living in an era of profound technological change and fast-paced innovation. Firms that fail to evolve with the times will be left behind as more flexible and adaptive competitors race forward. The risk for slow movers is not just reduced competitiveness – its industry consolidation locking them out altogether.

For today’s leaders, the choice is no longer whether to transform – but which technologies to adopt. Accountancy firms now have access to an extensive array of powerful solutions. Data analytics tools are delivering insights to power better decision-making. Automation is streamlining workflows, reducing errors and freeing up valuable time to focus on strategic tasks. And the demand for fast, secure access to accurate and timely data is only growing.

Yet, as accountancy technology matures, new challenges are emerging that extend beyond traditional tech solutions as regulators become increasingly zealous. In the UK alone, two-thirds of current business taxes were introduced in the past decade, according to Thomson Reuters. That’s 13 out of 19 business taxes. The sheer pace of regulatory innovation demonstrates the need for accountancy firms to be agile and capable of transforming at speed, as their clients face an ever evolving and intricate tax landscape.

Future success depends on equipping firms with the ability to meet the demands of both customers and regulators, striking a balance that not only satisfies current expectations but also lays the groundwork for evolving future requirements.

Growing complexity

Corporate tax management illustrates the complex nature of today’s accounting landscape. Changing regulations, new post-Brexit tax requirements and global initiatives – such as the Organisation for Economic Cooperation and Development’s (OECD) Pillar Two, which introduces a global minimum corporate tax rate of 15% – are placing unprecedented demands on tax and accounting professionals.

The most effective response is to adopt specialised software that is designed to manage compliance and evolving regulatory requirements. While adopting new technology can seem daunting, it should be seen as an opportunity, not an obstacle. Yes, there may be initial friction and deployment challenges during the early stages of transformation, but these are temporary. As firms adapt to new tools and workflows, they unlock significant benefits – including streamlined processes, improved accuracy, and the ability to stay ahead of future changes in an increasingly dynamic tax environment.

AI transformation 

AI is rapidly emerging as a game-changing technology for many industries, including accountancy. It’s true value lies in acting as a partner and collaborator, taking on the heavy lifting of repetitive manual tasks, freeing up valuable hours so accountants have more time to focus on building stronger client relationships.

To be effective, AI relies on accurate real-time financial data that is easily accessed and stored in a standardised format. But before even considering training a model, firms must solve their lingering data issues. With multiple bookkeeping and large volumes of inconsistent and duplicated data, firms often struggle to extract meaningful insights.

Resolving these issues requires integrating data from various bookkeeping systems using techniques such as cloud syncs and AI enrichment tools. Data must also be stored in a unified format, properly catalogued and free from duplication to maximise its value.

By deploying AI on a foundation of clean, reliable and up-to-date data, accountancy firms can enhance their performance during peak seasons and better manage the pressures of increased demand. Plus, digital transformation and the deployment of advanced accountancy and compliance software also put firms in a stronger position to respond to new complexities and challenges that will inevitably emerge in this dynamic marketplace.

Peak season may be over, but now it’s time to plan for the next one, anticipating customer needs and proactively adapting to shifting demands.

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Business

Future-proofing financial services investment

Source: Finance Derivative

Adrian Ah-Chin-Kow, Global Commercial Director at leading software escrow company, Escode, discusses how the financial services sector can prepare for the increasing investment ahead of the government’s industrial growth strategy, Invest 2035, ensuring resilience against technological risks.

The UK’s proposed Invest 2035 strategy sets a bold vision: to elevate the UK as a global leader in high-growth sectors. Financial services are at the heart of this roadmap, tasked with driving innovation, sustainability, and competitiveness. But as we look towards the future, it’s critical that the sector strikes a careful balance between embracing strategic investments and maintaining operational resilience in the face of an increasingly complex technological risk landscape.

The digital transformation currently underway in financial services is set to accelerate even further as organisations adopt new technologies like artificial intelligence, blockchain, and cloud computing. These innovations hold immense potential for growth and efficiency, but they also introduce new layers of vulnerability. For financial services to thrive in this environment, firms need to ensure their technology infrastructure is resilient, reliable, and capable of withstanding disruption.

Growing risks in a digital-first world
As government and industry push forward with initiatives to digitise the financial services ecosystem, the sector is becoming more dependent on technology than ever before. With this reliance comes the inevitable rise of new risks—risks that can threaten operations, customer trust, and even the stability of markets.

We’ve seen first-hand the consequences of technology disruptions in this space. When key software providers experience outages or security breaches, the ripple effect can be significant, disrupting not just the companies involved but entire networks of financial institutions that depend on those systems. The impacts of such disruptions, particularly in a sector where reliability is paramount, can extend beyond the immediate downtime, eroding investor confidence and creating long-term reputational damage.

In a world that is becoming more interconnected by the day, it’s crucial that financial services organisations are prepared for these challenges. Protecting against technology failures and ensuring business continuity must be top priorities for any firm that wants to remain competitive in the years to come.

Operational resilience: The foundation of future growth
The ability to withstand and recover from disruption is at the core of what will define successful financial services firms in the future. Operational resilience is no longer just a regulatory requirement—it’s a business imperative that builds trust with investors, customers, and stakeholders. The strategies needed to build this resilience are varied, but there are a few critical components every organisation should consider.

  • Software Escrow: As financial institutions increasingly depend on digital tools, software escrow becomes a fundamental safeguard. We know how crucial escrow agreements are for protecting access to essential tools. If a provider fails or encounters insolvency, escrow ensures that critical software and intellectual property (IP) are held securely by a third party, ready to be released to the firm. In a sector where continuous access to technology is crucial, this arrangement offers peace of mind, ensuring core operations are protected from unexpected interruptions.
  • Stress-testing and Business Continuity: Regular stress-testing and comprehensive business continuity plans are essential components of any resilience strategy. By simulating disruptions, firms can identify weaknesses in their operations and put in place measures to address them. Continuity planning ensures that businesses can continue to operate, even under extreme circumstances, helping to mitigate the impacts of unanticipated events and minimise disruption to clients and markets.
  • Collaborative Resilience Standards: The interconnectivity of today’s financial ecosystem demands industry-wide standards. We’ve seen collaboration across both the private sector and with government initiatives become increasingly important. The UK’s Invest 2035 strategy offers an excellent foundation for fostering these partnerships, helping to establish resilience as a shared priority across the sector. We’re already seeing frameworks like the EU’s Digital Operational Resilience Act (DORA) lead the way in embedding resilience into the financial services supply chain. This kind of regulatory guidance helps institutions understand how to manage risks effectively, reducing overreliance on third-party providers and ensuring that firms can respond quickly to disruptions.

Collectively, these strategies reinforce the importance of being proactive rather than reactive when it comes to risk management. Operational resilience isn’t just about surviving the next crisis—it’s about building a foundation for long-term stability and growth in a rapidly changing environment.

Resilience as the key to securing Invest 2035
As we move towards Invest 2035, operational resilience will be the cornerstone of success. The financial services sector plays a pivotal role in driving economic growth and innovation, and its ability to adapt and respond to disruption will be key to maintaining the UK’s competitiveness on the global stage.

Embracing proactive resilience measures is the key to future success. By incorporating solutions like software escrow, stress-testing, and government-backed collaboration into their operational strategies, financial institutions can secure the UK’s position as a competitive, reliable investment hub.

Looking to the future, the ability to navigate these risks while maintaining operational integrity will determine whether financial services can continue to be the engine of economic growth in the UK. With the right safeguards in place, the sector can not only meet the goals of Invest 2035 but also build a reputation as a safe and dependable destination for global investment.

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