Setting and Realising the Objectives of the Indirect Tax Function

The objective of an indirect tax function is to be fit for purpose and fully aligned with the operational priorities and risk appetite of the business. There is no single, one-size-fits-all blueprint, but every effective function shares one aim: to take strategic responsibility for the operational integrity of VAT-critical systems and processes, and to prove that integrity through tested controls rather than assumption.

What are the objectives of the indirect tax function?

The stakes are significant. Failures in VAT-critical systems and processes can lead to overpayments of VAT — a genuine and avoidable cost to the business — or to under-declarations that expose the organisation to penalties and reputational damage. For this reason, the internal indirect tax function should assume overall strategic responsibility for the operational integrity of VAT-critical systems and processes, and discharge that responsibility through the design and implementation of effective controls.

Controls alone are not enough if they are not tested. Without measures to capture and control the end-to-end VAT accounting process, any risk management strategy will be incomplete and, ultimately, unreliable. A stronger model incorporates periodic testing of controls, so that the effectiveness of VAT-critical processes can be demonstrated rather than simply assumed.

There is considerable room for improvement across the market. According to a survey by one of the Big Four firms, only 25 percent of companies report having specific indirect tax metrics in place, and most of those metrics address basic compliance rather than activities that improve the bottom line or strengthen cash flow. The wider conclusion is that, in most organisations, a strategic indirect tax plan supported by SMART individual objectives has either not been developed or not been properly rolled out.

How do you realise these objectives using SMART goals?

Setting realistic objectives is the starting point for any successful change effort. To improve the effectiveness of the indirect tax function, objectives should be expressed in SMART terms and translated into clearly defined tasks. A simple but effective technique is to take each objective and append the word "by …", then complete the sentence with concrete, measurable actions. Larger tasks should be broken down into smaller, more manageable ones.

For example, a high-level objective might be to create, protect and optimise value across the full range of the company's business objectives. By adding "by …" to that statement and specifying the actions that follow, the objective becomes something that can be planned, assigned and measured. The SMART framework supplies the discipline that makes this work:

Specific

Target a particular area for improvement.

Measurable

Quantify progress, or at least provide a clear indicator of it.

Assignable

Make ownership explicit — who will do it.

Realistic

State what can genuinely be achieved with the resources available.

Time-related

Specify when the result can be delivered.

Ultimately, the function should aim to create, protect and prove value, and support that aim with a robust business case for investment. Such a business case is most persuasive when it connects indirect tax activity to recognisable business outcomes: improved cash flow, reduced costs, better tax processes and well-managed tax-related risk.

What demands does this place on the tax function?

To be effective, the tax function must understand the activities and objectives of the wider business, including areas such as research and development, and align closely with other functions such as legal, HR and IT. A common business objective is to deliver higher quality with fewer people — in other words, to drive process improvements that can be summarised by the familiar shorthand of "easier, faster, better, cheaper".

Achieving this depends on both capacity and capability. The indirect tax department should be staffed with an appropriate number of professionals who are equipped with the skills and capabilities needed to succeed.

Is full VAT compliance a realistic goal?

Full VAT compliance across every transaction is rarely a realistic or cost-effective goal. It helps to be clear about two related ideas:

Effectiveness

The degree to which an organisation achieves its objectives. For the tax function, it is achieved when all material risks are managed and all opportunities are identified and acted upon.

Efficiency

How well time, effort and cost are used in pursuit of those objectives. Because indirect tax resources are typically scarce, available time must be used as efficiently and effectively as possible.

This is precisely why trying to manage every conceivable risk is rarely sensible. Not only is it cost-inefficient in its own right, it also drags on efficiency beyond the tax function itself — for instance, in the time the finance department must devote to VAT matters.

The real task is making the right choices. To direct resources toward the risk and cost-saving areas that genuinely matter, the company must first determine its risk appetite. A clearly defined level of acceptable risk allows for proper prioritisation, and frees resources from the unproductive work of reducing risks that already sit within tolerance. In practice, resources and budget should be aligned with the outcome of a risk assessment, with most time spent in the highest-risk areas. The efficiency and effectiveness of the function should then be measured periodically, compared against financial and operational KPIs, and reviewed in meetings where corrective actions are agreed.

A note of caution is warranted on the use of percentages to demonstrate control. The best known is the 80-20 rule, and statements such as "95 percent of our transactions are compliant" are common. Figures like these can create a false sense of security among senior management, reinforcing a general feeling that the company is in control when it may not be. The potential impact of the remaining error rate is better understood through a VAT throughput calculation.

What does "80% of invoices compliant" really tell us about risk management?

Consider the claim that tackling master data can make more than 80 percent of invoices VAT compliant. On its face, this sounds reassuring, but it deserves closer examination.

Suppose 80 percent of invoices are low risk and the remaining 20 percent exceed the company's risk appetite. The solution may well allow employees to be deployed efficiently, but it does not adequately support the achievement of risk management objectives, because the portion that matters most from a risk perspective is left unaddressed. For the purpose of this discussion the 20 percent has been treated as high risk; in practice, that classification should itself be investigated and measured before it can be relied upon for management decisions.

What are the performance requirements for the indirect tax function?

Clear performance requirements give the function something concrete to work toward. Any such framework is best treated as a non-exhaustive guideline rather than a definitive checklist. It should concentrate on indirect tax planning and regulatory compliance, and be framed throughout around the goal of adding value to the company's overarching business priorities.

How can Internal Audit support change?

Internal Audit can be a powerful ally in implementing change. A central objective of the Internal Audit function is to use a risk-based approach to give the Board and senior management comprehensive assurance that the organisation's material risks are being managed efficiently and effectively. Engaging Internal Audit early is therefore essential — both to establish meaningful change and to ensure that risk management practices remain aligned with the organisation's strategic goals.

Frequently asked questions

What is the main objective of an indirect tax function?

To be fit for purpose and aligned with the business's operational priorities and risk appetite, taking strategic responsibility for the operational integrity of VAT-critical systems and processes and proving it through tested controls.

What are SMART objectives in indirect tax?

Objectives that are specific, measurable, assignable, realistic and time-related. In practice, you state the objective and add "by …" followed by concrete, measurable actions tied to outcomes such as improved cash flow, lower costs and reduced tax risk.

Is it realistic to be fully VAT compliant?

Usually not, and chasing 100 percent compliance is often cost-inefficient. A better approach defines the company's risk appetite and concentrates resources on the highest-risk areas, rather than reducing risks that are already within tolerance.

Why can a "95% compliant" statistic be misleading?

Headline percentages can give senior management false comfort. What matters is the size and risk of the residual error rate, which is better understood through a VAT throughput calculation than through a single compliance figure.

How does Internal Audit support indirect tax change?

It provides risk-based, independent assurance to the Board and senior management that material risks are well managed, which helps embed meaningful change and keeps risk management aligned with strategic goals.