In this episode of VAT Talks we speak with Paul Gisby. Paul is Senior Manager at Accountancy Europe, a Brussels based organisation uniting 50 professional bodies that represent nearly 1 million accountants. We first discussed the benefits of digitalisation. Paul argues that although such a transition might come with short term cost, in the long term “paper based systems are obsolete, inefficient and not robust for the circumstances that we have experienced in the last year”. It therefore comes with significant benefits in the long term. The implementation of a real-time reporting system is an excellent way to digitalise VAT, which is one of the reasons Paul believes that “real-time reporting is a gamechanger”. Digitalisation does mean however that the role of accountants will change. Paul argues that this does not need to be a problem as it would allow accountants to focus more on advising, in which they can “actively help businesses grow and survive”. Lastly, we discuss why people should get more excited about VAT for which we dig into the relation between VAT rates and goat fur. And let’s agree with Paul: “what is there not to love about a tax where you can deal with such critically important questions as goat fur!”
Could you tell a bit more about your background and how did you end up working in VAT/taxes?
“As a Monty Python fan, I always thought accounting was very boring. However, I sort of fell into it as the first job I was offered after leaving university in the late 80’s. I had a psychology degree, which back then quite frankly meant either becoming a therapist or working in HR. To be honest, I didn’t fancy either of those possibilities. So, I joined a small accounting firm as a trainee and qualified with them. I ended up becoming a partner at a small practice and worked there for 13 years. There was not a lot of international work involved back then, but it did include a lot of VAT work.”
“Then, at some point, the whole compliance aspect of dealing with personal tax returns almost literally drove me mad. In the end, I couldn’t face looking at another 20 years of doing that. So, I retired, took a few years to sort my head out and moved to Brussels. There, I joined Accountancy Europe. This is now some 7 years ago. I mostly work in the policy area and my exposure to international tax is a lot higher than before. Still, I’m not what I would call an international tax technical specialist.”
What do you find so interesting about this field of work?
“I just immediately found tax interesting. I think one of the reasons is that it has a direct impact on your wallet. I was training as an accountant in a time where each year the UK government was cutting the personal tax rate massively. This meant that every year we were going through our payslip to see how much better off we were.”
“It’s also interesting from a client’s point of view. When I discussed financial statements with my SME clients they were not particularly interested. However, as soon as I started talking about tax their eyes lit up. So, I naturally gravitated towards tax. I found that I had an affinity for it.”
The digitalisation of taxes is a hot topic, see for example the programme of current President of the Council of the EU, Portugal. What could the benefits of further digitalisation of VAT be both for businesses and governments?
“For me, when speaking about digitalisation, we’re talking about exchanging short term costs and disruptions for, potentially at least, much larger longer term improvements in efficiency, reduced costs, better tax payer experience and governments being able to keep control over their tax bases. Especially in light of the last 12 months, having digitalised tax services, or any government services, has shown to be critical. Paper based systems are obsolete, inefficient and not robust for the circumstances that we have experienced in the last year.”
“It’s interesting to see that Brussels SME representative organisations (i.e. putting forward the views of SMEs across Europe to policymakers) really believe in digitalisation. Furthermore, they support real-time reporting, because this should lead to a big reduction in costs for SMEs. Real-time reporting could drastically reduce the burden of financial reporting and tax reporting, through pre-filled tax returns, which could be very valuable for SMEs.”
“Of course, it will help governments as well, reducing possibilities for tax evasion and avoidance. I’m fully aware of the importance of data protection and I fully support the privacy of personal data, but the real benefits come if you share data across government departments, and across business departments for larger enterprises. Although big data and data analytics are viewed by many with suspicion, they can have real benefits for governments and citizens. One thing I would like to see for example is that at least every government, and perhaps some element at the EU level, has a fully digital portal. It would be fantastic if e.g. small business owners only had to go to one website to sign up for business registration, VAT, income tax and for all other regulatory requirements. I’m struggling to understand why we’re not seeing more of these developments and sometimes I feel that privacy is used as an excuse - although I very much appreciate that privacy is at least part of the discussion.”
When speaking about VAT and digitalisation, what is the most important development within the EU (could also be on the Member State level) at this moment?
“In respect to the VAT, I think there is now the realisation that the definitive regime proposal is, if not dead, not in the best of health. So we’re seeing a continuous shift from the European Commission towards trying to achieve the same ends (primarily fraud reduction) through using technological developments. I think that, from the Commission’s point of view, this is very much about educating Member States - drawing upon what some countries are doing well and demonstrating the benefits to other Member States.”
“From a European point of view, we need some sort of harmonisation of real-time reporting. I’m not necessarily talking about a centralised system run by the European Commission that every business feeds into, but there should be at least some interoperability between different Member State systems. This harmonisation should for instance allow a Spanish company making cross-border supplies in Italy to seamlessly report their invoices to both systems. Again, that should really be the bare minimum that everyone wants from such systems.”
“This harmonisation is essential. There is no doubt that having non-compatible Member State systems for all aspects of business operations causes friction and reduces possibilities for cross-border trade. I stress again, this particularly affects SMEs.”
“In respect of what’s coming up, in 2022, the Commission is looking at their general proposals for VAT in the Digital Age, which means VAT reporting and e-invoicing. I can’t believe we haven’t got there yet. It’s remarkable that you can easily talk to someone about e-invoicing and they still mean PDFs. Surely, in the 21st century we can develop a solution for secure e-invoicing.”
“Something else I’m looking forward to seeing is what is proposed for the VAT treatment on the platform economy, as well as developments on the single EU identification number and aspects related to the import One Stop Shop. Such regulation can help minimise friction in setting up, registering and conducting business. For me, this is very important, especially regarding smaller businesses. The problem is, there are very, very few policy makers who have ever been an SME. I was an SME. I co-owned a small practice and acted solely for SMEs. A lot of times, when you speak to people here in Brussels, they struggle to fully grasp the realities of running a small business.”
From your experience, what is the biggest hurdle for further digitalisation of VAT throughout the EU.
“The first file I ever worked on for VAT with Accountancy Europe, was the harmonised VAT return proposal. This came down to certain Member States arguing about how many boxes a VAT return should have. I have to admit, I found the whole experience a completely depressing example of the ‘not invented here’ syndrome: so and so only has 7 boxes and doesn’t want 12 and someone else has 100 boxes and doesn’t want to cut to 80.
“This is always an issue with sharing best practices with other countries. It is especially difficult for large countries to learn lessons from smaller nations - -it’s just not part of the way they look at the world. But, if you look at countries like Estonia, who started with a clean sheet of paper, they are the countries coming up with the innovative, more forward looking solutions. “This brings me to another hurdle: legacy systems. I’m not just talking about legacy software, or processes, but also machines. You only have to go into a government department and you can see machines that look to date back to 486 processors.”
“Also, and I’m not downplaying this at all, but inevitably if you are going to automate, systemise and digitalise a process, existing jobs will go. This is not only true for the public sector, it’s going to affect the accountancy profession as well. For example, classic compliance jobs will probably disappear. They won’t go as quickly in some countries as in others, but everyone seems to accept that this will inevitably happen. This means that you need to get the structures in place to cope with this transition and to take your employees along with you. Ultimately, for me, this will result in a more fulfilling job. As I said, the compliance part was not my favourite part of the job. I much prefer the consultancy, the business advisory side of the profession. I believe that many people, if they receive suitable training, will find their jobs more interesting, specialising in areas such as investigations, risk assessments, advice etc.”
“Lastly, and I already touched upon this, I think data and privacy protection is too often being used by governments as an excuse not to modernise. If they don’t want to change the process, it’s a useful “bogeyman”, as we say in the UK, to put out there. For me it’s utterly bizarre that people, myself included, are prepared to give huge amounts of private data to companies that have absolutely no regulation whatsoever, but they seem to be terrified to give data to their governments. So I’m sure there are solutions out there that deal with both the digitalisation and the security of the data.”
What do you think is the biggest flaw of the current VIES system and what do you think about the proposal of the EC to come up with a real-time reporting system for intra-Community transactions?
“My experience with VIES is that the system is extremely limited. It has a very low base level for information. The main criticism and feedback I received from experts on this is that you can’t necessarily trust the data. The Member States are under no legal obligation to ensure that the information is up to date - there could be traders that have even been struck off in their individual Member State that are still showing on VIES.”
“I can only see the utility of something like VIES being greatly enhanced if it was somehow linked to real-time reporting to tax authorities. So for example, you would have a real-time reporting obligation for businesses to report to their national governments and then this information is reported by the national government to VIES. Anyway, it can’t be beyond the bounds of 21st century technology to be able to link the data of 27 Member States and a central database in a secure way.”
What do you think of real-time reporting in general and what would be the effect of real-time reporting on the work of accountants?
“I think real-time reporting is a gamechanger, it’s inevitable for the reasons we talked about: fraud reduction, simplification and not necessarily having to do full financial and tax reporting. We actually spoke to the European Commission about this recently. So in respect to real-time reporting, I know they still have significant questions regarding the frequency of reporting, the level of data reported and how that data is stored.
“I also think that the potential of cash-flow issues is something to consider. At the moment, businesses can, if necessary, defer delivery into the next quarter so that it matches the input VAT. With real-time reporting, there is the risk that you could end up having output VAT for the full value of the transactions, but for which the inputs would arise in subsequent VAT periods. This could lead to cash-flow difficulties.”
“Regarding the role of accountants, let’s be honest. There are many accountants out there that regard developments like real-time reporting as very dangerous to their business model as they make money out of compliance. In my view, these accountancy practices should already be looking at diversifying their business and services. Accountancy Europe is actively working on this. We are currently running a project on ‘SME risk management’. We’re trying to promote the idea that accountants are not just there to do form filling and box ticking. They can actively help businesses grow and survive. We are trying to get this shift, but it’s taking the profession a while to move this way. Also, it needs to be remembered that in some Member States, sections of the profession face legal constraints on what services they can provide.”
“Change is never that simple, but i believe that, ultimately, compliance work is going to dry up or will become so automated that few people would be employed in it anyway.”
If you could give one piece of advice to the European Commission related to digitalisation of VAT, what would it be?
“It seems they have already heard it, as it was brought up during the recent EC Conference about green taxation, but I would say: I’m afraid that facts and experts aren’t enough anymore. We’ve seen enough in the last 10 years to know that warnings about the downsides of a course of action isn’t enough to stop people voting for it, whatever the economic consequences may be. Policymakers need to appreciate how the messages they’re sending out may be perceived.”
“This also applies to VAT, when you talk about subjects like zero rating and reduced rates. For example, in the UK there was something called the pasty tax. Pasties are a peculiarly (and delicious) British type of pie. The government proposed to remove the zero rating and apply a standard rating on pasties to bring their treatment in line with other foodstuffs sold hot. This was headline news! I mean, if you can’t have a rational policy discussion about a pasty, what hopes are there for more fundamental reforms of the tax system. I think everyone accepts that we need to act on climate change and we have all sorts of other existential issues queuing up at the doorstep. We should not be arguing about the VAT treatment on baked goods. My point is, this is an excellent example of messaging – both from the point of view of the poor communication from the government and the excellent messaging from those opposed to the change, including elements of the press.”
“Then there are also things like the cognitive behavioural bias of the sunk cost fallacy which makes governments think: “I’ve invested so much in this piece of rubbish, I’m going to stick with it”. At that point, it’s often too much of a loss of face to turn back the measures. On a serious note, these biases have a real impact on our day-to-day lives. Confirmation bias means that people are increasingly picking their news just to hear the things they want to hear. This is really quite dangerous and for any sort of policy development, you have to look at the way that is framed (i.e presented) – which has been proven to have a substantial impact on the way that it is perceived by the recipient.”
What would you say to the reader to make them excited about VAT?
“[laughing] You’re talking to someone that doesn’t really get excited about anything, but I would say that VAT and indirect taxes are only becoming more important. There is a role for VAT in the greening of the tax system. It’s not necessarily a simple role, because you always run into problems such as regression, with the poorest household potentially hit the hardest. Still, VAT and taxes on consumption have advantages, because they can be very targeted to change specific behaviour. Indirect taxes are also a bit harder to avoid than other forms of taxes as they are easier to monitor, especially when they are based on the flow of goods.”
“Still there are challenges- there are changes that need to be made to the VAT system and this makes it an interesting field of work. Also, it’s kind of hard not to love a tax where people argue about whether a piece of confectionery is a biscuit or cake and actually go to court to argue how biscuits and cakes are made. Or whether you change the VAT rate, depending on where the goats come from for the fur that’s used around the hoods of childrens’ coats. What is there not to love about a tax where you can deal with such critically important questions as goat fur!”
We would like to thank Paul again for his time and for giving his perspective on VAT. The opinions expressed in this article are personal. If you have any questions, suggestions or if you want to be our next interviewee, do not hesitate to contact us via firstname.lastname@example.org