Automating the Tax Tangle

The importance of international trade to the UK economy

Foreign demand for goods and services produced by UK firms can help those firms achieve economies of scale, leading to lower unit production costs and the ability to price competitively at home and abroad. Without trade, such scale would only be achievable in countries with very large populations.

The expansion in domestic production provides jobs and increasing value added contributions to GDP, but also produces welfare improvements for UK consumers to the extent that the benefits of scale are passed through to lower prices for final goods and services, either directly or indirectly (through the supply chain). Even in cases in which not all of the gains are passed through to consumers, firms earning higher profits can use them for direct capital investment or indirect investment through savings, thus boosting demand in the economy via other sources.

International VAT automation may help firms achieve:

65% reduction in labour allocated time to VAT compliance
100% reduction in VAT outsourcing costs
67% decline in fine and audit costs

Brexit and current trade flows

Needless to say, negotiations are still ongoing. Although it does appear likely that the level of market access to the remaining EU states will decrease following a formal exit in 2019.

In 2015, 47% of UK goods exports and 39% of services exports were destined for the EU. We can expect to see this dynamic shift following Brexit, with UK traders subject to more restrictions than exist today on operating within the EU single market. The UK may therefore need to look outside the EU to build stronger trade deals with the rest of the world, once it is no longer bound by EU trade policy.

The added complexity that UK exporters could face:

The magnitudes of the UK’s goods and services exports and imports

The UK trade deficit in goods reached £126 billion in 2015, only partly offset by the £87 billion surplus in services, producing a net trade deficit of £39 billion.

The split between EU and non-EU trade in each of the categories

For the producers and providers of these exports, the need to find efficiency improvements as a counterbalance becomes all the more binding. As such, the incremental productivity improvements that are possible through the automation of administrative functions like international VAT compliance come into sharper focus.

Strategic automation

International VAT automation may help firms to achieve a 65% reduction in labour time allocated to VAT compliance

The most significant efficiencies were found in the time and resource savings of firms no longer needing to consume the same amount of employee time on VAT compliance. While these will be internal savings for some, for others, investment in an automated VAT platform could entail a reduction in the ongoing use of outsourced international tax compliance services. Either would result in a boost in the profit margins of these exporters.

With automation becoming an increasingly topical issue, the prospect of job losses confronts many sectors. Current UK government policy is aimed at retraining a critical mass of workers. Our research shows that successful training, upskilling and internal redeployment will help businesses to drive even higher firm profits and help them make larger value added contributions to GDP.

  • Internally redeploying 40% of the affected staff is enough to support an extra £4.3 billion in revenue, resulting in almost £3.5 billion in economic gains throughout the export sector and the supply chains on which they rely.
  • The overall realisable gains from effective staff redeployment could reach £4.7 billion in direct economic gains, rising to £8.8 with the inclusion of supply chain impacts. Even at a firm level though, redeploying just 40% of staff entails an approx. 50% increase in eventually realisable economic gains for the firm, potentially as profit.

Conclusion

By Cristian Niculescu-Marcu, Managing Economist CEBR

VAT automation provides sizeable economic benefits to UK exporters. The extent to which individual firms are able to realise these benefits depends on the foresight and resources UK exporters have in being able to forego short-term profitability for greater benefits over the long-term. Holding off on cashing in benefits and investing in the retraining and upskilling of staff as part of internal redeployment can help to generate up to 50% greater economic benefits over the long term relative to a scenario is which these staff are ‘let go’.

The benefits available to firms are also relevant to the tactical decisions of businesses, such as exploring the feasibility and profit maximisation opportunities of passing the efficiency savings onto consumers through lower prices. We know that consumers respond to this, making exports more competitive and resulting in greater demand for that specific product. This growth in revenue will provide extra cash inflows. Sharing gains with consumers through lower price is therefore perfectly rational when it boosts demand, supports expansion and the ability to harness economies of scale, ultimately increasing profits and their contribution to the economy.