While large corporations typically have a dedicated tax team, SMEs (Small Medium Enterprises) — the backbone of the global economy — often rely on smaller groups of finance experts, who are expected to perform a wider range of tasks. Unfortunately, this can leave SMEs unsure of how to manage their compliance responsibilities, especially as regulations constantly shift and evolve.
As most suppliers tend to be SME's, large corporations who are working with said suppliers are at risk of not being able to deliver compliant invoices. Now, organisations are facing an increasingly daunting prospect: governments around the globe are seeking to increase their tax receipts by mandating I2P (invoice-to-payment).
When do I2P mandates come into effect?
The speed of the rollout for new government mandates depends largely on the jurisdiction in question. We recently reported on the French government’s 18 month delay to their I2P mandate deadline, in recognition of the struggle businesses have experienced shifting to new systems with little notice. Other countries, such as Italy, already expect businesses to use I2P for payment.
So what is the cost of not managing I2P mandates, and how can smaller businesses handle their invoicing to guarantee compliance? Below we’ve summarised the key findings from our Cost of I2P Non-Compliance white paper.
What are the costs of non-compliance?
When a business doesn’t comply with financial responsibilities, significant penalties may follow. Penalties can take the form of punitive fines or fees which hit the bottom line, wreaking havoc on business operations.
For example, failing to digitise and manage e-invoicing, as per government mandates, will render some businesses unable to send invoices to their customers. Businesses may find they have limited options at an economically turbulent time, negatively impacting the stability of cash flows at the worst possible moment.
Ruud van Hilten, E-invoicing Compliance Leader, Kofax said:
‘The cost of non-compliance can be both quantitative and qualitative. Quantitative refers to the penalties you will have to pay, and the increased audit regimes you will be subjected to which are expensive and disruptive.
‘But non-compliance also deteriorates your relationship with the Tax Office, which is qualitative. It may have an effect on your share price, it affects shareholder value, brand value, the trickle down costs are very high.’
The ‘best’ case scenario for uncovered non-compliance
Perhaps the least impactful consequence of non-compliance is that you’ll be in the bad books of the local tax authorities. In that instance, tax audits become much more likely, which can be costly and disruptive to everyday business operations. It’s far better to avoid the inconvenience of increased scrutiny upfront by ensuring that finance teams remain compliant at all times in the first place.
‘Once you’re in the tax authority’s bad books you’ll stay there for some time’ says Ruud.
The worst case scenario for I2P non-compliance
The worst-case scenario for non-compliance is that tax authorities could pursue criminal damages. Tax authorities worldwide typically enjoy broad powers to take legal action, up to and including seeking criminal convictions if evidence of wrongdoing (such as flagrant non-compliance) is identified.
Knowingly disregarding the rules is unlikely to work in your company’s favour, and could affect your company’s public reputation. Consumers are not sympathetic to businesses that appear to dodge tax contributions. The consequences for violating tax rules are not purely at an organisational level, but can impact individuals within the company too.
There’s also likely to be a knock-on effect on your customers and suppliers. Even if you aren’t willfully ignoring government regulations, other companies could explore legal action if their position has been compromised or tarnished by demonstrably neglectful actions, such as your non-compliance resulting in a negative impact on their own income.
Faced with the potential crisis noted above, it could seem sensible to bring the entire process in-house. Conventional wisdom, in finance, tends to favour direct control in such circumstances. However, there are a number of reasons why it’s actually a much better idea to move e-invoicing management externally.
Why businesses shouldn’t take their e-invoicing in-house
While direct connections between ERP systems and government portals are available, you should carefully consider whether your business has the capacity to maintain this system on its own. SMEs, who traditionally rely on lean teams of highly talented individuals, may not realistically even be able to afford the management of such a system. If there’s a risk you could encounter difficulties paying local tax authorities, you should consider carefully whether it’s a risk worth taking.
Constant updates to the management of financial documentation and invoices, in line with frequently shifting regulation, is a full time job in itself. The work is tedious, legally complex, expensive, and unique to each country you operate in. The process is never ‘complete’. You’ll always have to stay on top of tech updates and legalese, using up a lot of time in addition to your team’s current responsibilities.
So, what is the answer? Outsourcing.
More specifically, you should consider handing over the cumbersome responsibility of I2P compliance to qualified third parties that specialise in managing government-mandated finance documents, such as Tungsten Network. They’ll have all the tools they need to add value to your operation, such as creating compliant invoices and connecting with the government for you.
Ruud says: “And that's another reason why it’s effective to work with a third-party like Tungsten. We can make sure your suppliers provide the right data, we ensure you’re complying with the business logic required by the buyer and we send your invoice to the government in the right format with the right information.
As a result, you’ll not only save your business time, money and stress, but you’ll be able to run a much more efficient Accounts Payable or Accounts Receivable process. Whatever happens to government mandates in the future, your company will be fully equipped to avoid punitive measures from tax authorities.
Manage e-invoicing easily with Tungsten Network
Most governments with mandates offer a portal that you can connect to manually to submit your invoices. But in the fast-paced and busy world of the SME, very few have the resources to submit invoices into government portals manually.
Managing mandate compliance can be a painful exercise, particularly for smaller firms that may not have the IT capacity, staff, or budget to comply. However, Tungsten Network has the world’s largest, compliant business transaction network which helps global businesses progress on their journey to world-class performance we are ideally positioned to help.