RA Question of the Week – The VAT Man

For this weeks question, I’m actually going to ask two questions. The usual how would you identify this loss? and a second question – does this fall under the remit of Revenue Assurance?

This weeks scenario:

In the UK, VAT on mobile phone calls is calculated in one of two ways; for calls originating within the EU VAT is charged at 17.5% (the standard UK rate) for calls originating outside the EU VAT is zero rated. The operator I was working for had assumed that IT systems were calculating these figures accurately and were paying the VAT man accordingly. However this was not the case and the operator was in fact paying 17.5% of ALL prepaid call revenues to the VAT man. Needless to say the financial implication of this was massive.

I’ve slightly simplified the above scenario  – as I don’t want to delve into the legislative joys of VAT, but hopefully I have painted the under-lying picture.

Dave Stuart
Dave Stuart
David is an experienced manager, having worked for a variety of international telcos. He has hands-on knowledge of fraud management, revenue assurance, risk management and software development. David is currently the Group Director of Revenue Assurance & Fraud Management at Vimpelcom.

6 Comments on "RA Question of the Week – The VAT Man"

  1. A clarification on the question? Were all calls billed at 17.5% and did the clients who made calls outside the EU know that they were paying vat? It being prepaid, is it assumed that the customer paid this vat then?

  2. Hi Guera,

    For Uk prepaid services, VAT is actually charged at point of top-up ie when you buy a £10 top up card £1.49 of the £10 is deemed VAT. How that VAT is then accounted for becomes the challenge of the operator. So when the customer spends the £10 airtime on EU originating calls the £1.49 is then given to the VAT man. If however the £10 is spent on calls originating outside the EU it is deemed that the customer was never charged the £1.49 VAT and hence there is nothing to hand over to the VAT man. Technically to the customer, this is all built into their pricing, however in reality it is calculated post the event

    Crazy I know….

  3. Thanks to my intensive accounting training, this is how I would approach the problem.

    1) Determine rule: VAT is 17.5% when it does apply to a call
    2) Determine rule: VAT does not apply to all calls
    3) Find value of all calls in a period
    4) Find value of VAT paid for the same period
    5) Multiply value of all calls in the period by 17.5%
    6) Compare answers in step 4 and step 5
    7) Realize something must be wrong because the numbers are the same!
    8) Analyse or estimate value of taxable calls vs. non-taxable calls
    9) Ask for money back from the taxman!

    I know it sounds simple, but you would be amazed how times I have seen people come up with “clever” solutions that get the answer horribly wrong. Sometimes the back-of-the-envelope calculation is better than drilling into the data. At the very least it acts as a sanity check. If somebody had been doing this in the operator you were at, then the problem would have been obvious straight away.

    Did I ever tell you about the time I did something similar and found a UK company that was handing over more than 17.5% to the taxman?!?!? I don’t want to spoil your question, but kudos to anyone who can correctly guess why that happened…

  4. Lee Scargall Lee Scargall | 2 Sep 2008 at 3:33 pm |

    10) Rebate the customer.

    In response to Eric’s point, I have also seen a classic case where the marketing/pricing team wanted to charge (including VAT) £1 per SMS. When the proposition ended up at the rating team, someone calculated the retail price at £0.825 and VAT at £0.175. Wrong!

    I also have a golden rule, if anything relates to volume, accuracy, or timeliness, then it should come under the remit of RA.

  5. Hi Eric,

    You have correctly identified how we quantified the impact of the over-payment once the problem was identified. However what/is there an RA solution that would identify this problem?


  6. Hi Dave,

    That was my solution – I think somebody should be doing basic sums like this all the time. In fact, probably somebody is – but possibly they do it with other reasons in mind and do not think of it as a kind of revenue assurance. I usually call this kind of basic check an “analytic review”. It is not proof, but it can indicate problems, and is especially useful at giving a quick helicopter view and ensuring you understand your data. In other words, every month, you get out the calculator, get some basic data from simple financial reports that tell you things like how much you collected, and calculate some ratios. To be precise, the relevant calculation for this error would typically be to calculate the ratio of VAT to total revenues every month (I might do this instead of calculating the ratio to EU revenues if I did not have the split, as I assume I do not from the way the question was asked). I would also calculate ratios like revenues from customers on-net versus off-net and things like that. A lot of this is done in order to understand the performance of the business, but it equally well can indicate a flaw in the numbers. In this case, as the ratio of VAT to total revenues will be 17.5%, the alarm bells would go off. If I had used the EU revenues in the calculation instead of total revenues, then the ratio would be greater than 17.5%, and again the alarm bells would go off.

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