As consumers, we can consider ourselves lucky if the announced VAT reductions also affect us. The reductions are intended to boost the economy – a noble goal. In any case, they will stimulate many areas in the IT industry and also help IT service providers. And what does this have to do with commissions and how they are calculated? This question is a good one, the answer is amazingly simple: A lot!
Commissions are subject to VAT in most areas, both nationally and internationally. In the past, the subject of VAT and VAT changes would not have been an issue in the insurance industry. But this has increasingly changed in recent years and further adjustments are sure to come. For example, commissions for directly involved contract brokers in the insurance industry are VAT-exempt. The discussion about VAT liability for differential remuneration or other indirect commission participations in sales is not new.
Subsidies and services subject to VAT in the calculation of commissions
Broker-related subsidies of all kinds, competitive remuneration, special bonuses and also broker-related investments, e.g. for hardware, software licenses or the like, are often subject to VAT. And this also results in IT challenges for the commission calculation system. Now, this change may sound trivial at first. VAT will (temporarily) be reduced from 19 percent to 16 percent for services provided on or after July 1, 2020. Regardless of when these services are remunerated. What agreements does this concern? Are these agreements ideally standardized and equipped with cost centers? Or were they recorded on a highly individual basis? The more unstructured the creation of the individual agreements is, the more difficult it becomes to obtain data alone, on the basis of which follow-up actions can then be taken. This includes reviews by Controlling and Financial Accounting. In some cases, agreements may have to be adjusted. This will require coordination between the internal sales force, business offices and sales representatives. One of the few positive side effects of the COVID-19 epidemic is that companies have become more digital in all areas. Being more digital is especially advantageous now, when quick action is required. Because the next commission calculation will take place very soon. The incorrect reporting of VAT will cause considerable problems. Not only because it must be corrected, but because tax consultants and auditors will closely examine this period during their audits. A commission posting with incorrect VAT always has an effect on the paying company and on the brokers who receive this incorrect posting and who have it in their books. The amount of the error may be small, but in addition to the loss of reputation, it also involves an enormous effort, and consequently, costs for which a better use could probably be found.
The ideal scenario would certainly be that:
- All relevant agreements can be determined at the push of a button.
- And all relevant remuneration as well.
- The VAT rate can be easily changed and with reference to a key date in the commission system, since it is a key value, for example.
- The change to the VAT rate is recorded in a tamper-proof log.
- When the key value is changed, all postings are automatically entered with the changed VAT rate.
- All reports and internal evaluations contain the correct VAT rates.
- There is no need to make adjustments to the brokers' commission notes.
I hope that this ideal scenario exists in your company or that your company at least comes close to it. On the other hand, if you do not take advantage of the opportunity to optimize documentation and processes with regard to VAT, your company will be faced with a major challenge, not only with regard to July's calculation. Because the changed VAT rates are valid (for the time being) until the end of the year – then the next adjustment is due. But now, the first thing to do is to implement the first change properly. Then you can hopefully enjoy the summer (vacation) in good health and benefit from the reduction in VAT in one way or another!
And if this ideal scenario does not exist in your home: We would be happy to talk to you about it. We offer an evolutionary standard software package for the insurance industry, and with in|sure Commission, we offer an industry and business line-neutral commission component. Feel free to contact me, I am only an E-Mail away.