The cost of I2P non-compliance – Part 2: Where’s the harm?

Having discussed the issues of invoicing non-compliance with Ruud van Hilten of Tungsten Network  in part 1 “The cost of I2P non-compliance – A fragmented landscape,” we’ll now turn our attention to what CFOs and compliance officers, and even CEOs and CPOs, should be considering as priorities.

“While not always the case, most large corporations will have a tax team, because enterprises are subject to a lot of scrutiny and there is significant pressure to make sure the business complies,” said van Hilten. “But what happens with the backbone of any economy — the SMEs?

“Most governments with mandates offer a portal that you can connect with manually to enter your invoices. So the technology, albeit not very elegant, is available — but in the real world of the SME, no-one wants to, or has the resource to, key-enter invoices into a government portal. It’s not part of their core job. In addition, these portals are rarely designed for ease of use. For companies that send high invoice volumes, governments usually offer a facility to connect finance systems directly to the government platforms using APIs or other technologies, which is fine if you have a solid tax and IT team at your disposal that understands what they need to do, what’s coming and can plan.

“For those that have no in-house capability to do that, or to plan for it, it’s almost certainly going to affect their operations and their IT budget. Even if they have already rationalized their vendor base, or digitized their procurement processes, mandates are still disruptive and expensive. How you submit information to the government in a prescribed file format and how you receive information back from the government needs to be project-managed. And you may need to review some projects you already had planned.

“So compliance with mandates can be a rather painful exercise, particularly for smaller firms that may not have the IT capacity in place to comply.”

Compliance for business continuity

Of course if you don’t comply, there are penalties. These aren’t just in the form of fines or fees. If you don’t, or can’t, comply with an e-invoicing mandate, you simply cannot send invoices to your buyers to get paid, and at some point, your cashflow will break.

“If you are just doing business in one country with local firms,” explained van Hilten, “then you may be able to manage it, but if you are the leader of an organization doing business in multiple countries and regions, this requires real planning. You need to look at a more continuous solution, because compliance mandates will continue to be implemented and they have a tendency to become more complex and with shorter deadlines.

“If you plan to do it all in-house, you’ll need to get your ERP system adapted to connect to the government portal. The tech is available, and a good IT department can work with the government APIs to do that. But the question isn’t if you want to do it yourself — it’s more should you do it yourself? And for an SME the question is more pertinent – can you afford to do it yourself?”

The answer to both those questions is no!

Why you shouldn’t take an in-house approach

“This is an extremely complex exercise,” warned van Hilten. “And it’s expensive. Should you undertake this yourself, aside all the requirements to understand the intricacies of the various mandates and regimes, and foresee changes ahead, governments will continue to update and change legislation, the obligation to comply will become more and more stringent and you’ll have to be ready to make more and more changes. Not to mention the time and resource it takes.

“So the best advice is to outsource the elements you can to a third party that specializes in automation of trading documents, like invoices, and that can connect with governments quickly on your behalf. There’s more to compliance than just creating compliant invoices, you want to create efficiencies, because government mandates in themselves don’t drive any digitization in the supply chain or automate any processes, what they do is give the government what it needs.

“If you work with a third party, it’s advisable to find one that will do more than just comply with regulations. A specialist with all the right instruments in its toolbox will enrich and add value to your invoices and improve the invoice data so you as a buyer can run a more efficient P2P or AP process and as a supplier can rest assured you’ll get paid on time.

“Equally important is to work with someone that can give you transparency. Governments have added a whole new layer of approvals and scrutiny to the process: you need to be able to see where your invoice is in the flow, whether it’s approved, whether you need to resubmit — and do it quickly. Otherwise your cashflow is at risk.”

Non-compliance costs in summary

So to summarize invoice compliance in an expert’s words: make sure you don’t get caught by surprise; make sure it’s on the radar of your tax team, plan for it, and if you are a smaller firm, don’t even try to do it yourself – do not go down the rabbit hole of doing it once then having to continue to do it for a long time to come.

The mildest consequence of non-compliance is that you’ll be in the bad books of the tax authority, and they will probably audit you more often, which can be costly and disruptive. Audits are not easy things; they force you to free up resource and take time away from your normal business operation.

“And once you are in their bad books — you’ll stay there for some time,” he said.

Then there are penalties, which can run into significant amounts of money, and that comes on-top of the increased scrutiny.

“The worst case scenario is criminal damage,” van Hilten advised. “It can affect your reputation, your public image, your customers and your suppliers. In some countries, non-compliance is seen as tax evasion and can be considered a federal crime. Of course not all non-compliance is wilful, but the law is often nebulous and it’s easy for people to make mistakes.

“But whatever the cost of non-compliance,” he said, “it will always disrupt your business. You’re just better off getting it right first time.”

In part 3 we’ll look at how a third-party e-invoice specialist can help.