Government VAT Audits
Recent trends and developments on what you can expect from a VAT audit in the European Union
15. February 2012
All type of businesses, independent of their size and industry sector are confronted with it: VAT inspections carried out by the local Tax Authorities. Beside the fact that such audits bind human resources, they are costly & time consuming for the businesses affected, and in most cases there are strong concerns of a retrospective VAT assessment payable for previous tax periods (up to the statute of limitations).
Deloitte Switzerland started research regarding the key areas to be looked at during VAT audits, frequency and aggressiveness of the Authorities in the following European Countries:
From the country by country expertise below, you will see that the governments have individual angles for VAT audits. A clear focus is on compliant invoices and their recording, as well as on the usage of computerized systems during VAT inspections. Larger companies are more often faced with audits than other businesses.
The fundamental results received can be broken down as shown in the county highlights:
- Generally, VAT audits for foreign, non-resident entities are carried out at the premises of the Austrian tax representative. Typically, the VAT inspector requests the VAT ledgers, the underlying invoices and he may ask to be provided with copies of any contracts relating to the transactions.
- The Austrian Tax Authorities review the implementation of the outcome of past VAT audits, i.e. whether failures have been corrected and set up properly.
- Further, a clear focus is on invoicing requirements to be met for input VAT deduction, import documents for deduction of import VAT, the assessment of taxable self supplies and the fulfillment of the requirements for the application of any VAT exemptions, e.g. transport documents relating to exports and Intra Community supplies of goods.
- In addition for Intra Community transactions, the Austrian Tax Authorities check the correct VAT Identification Numbers of the recipients, correct filing of EC Sales Lists and they match the information recorded in the VIES-Database.
Finally, permanent establishment (PE) issues are considered by an analysis of the transaction structure.
- Companies of a significant size tend to be more and more audited.
- In most cases, the tax inspector is accompanied by an expert in computerized tax audit.
- Regarding the reassessments, French Tax Authorities tend to become more and more aggressive in the proposal of tax reassessments (notably in terms of penalties and VAT issues).
Further, Deloitte France faced difficult tax inspections in the case of the involvement of Swiss Principal Companies, where the Tax Authorities were trying to qualify a PE in France. When the PE is not obvious, the French Tax Authorities usually try to achieve tax assessments on the basis of Transfer Price reassessment.
- In the majority of cases, VAT audits are carried out in an objective and neutral atmosphere; however, as shown in a survey carried out by Deloitte Germany, 12% of the audited companies felt a tense or even hostile atmosphere, which should give cause for reflection.
- The focus of an audit will vary on the type of business.
- Specific additional expenses in the area of VAT are allocation of input VAT amounts concerning (partially) non-taxable revenues, supporting evidence in the books of accounts and vouchers for Intra Community supplies and exports, formal accuracy of invoices and the reconciliation of sales or revenue with the VAT accounts.
- According to the above mentioned survey, only 8% of the audited companies faced relevant or very high additional expenses.
- Companies are experiencing a more aggressive attitude of the Tax Authorities during tax audits as the authorities endeavor to minimize the effect of tax avoidance and tax evasion. There is no specific calendar for the audits, although, large business companies are audited on a more frequent basis (at least once every two years). For these companies, the relationship with the Tax Authorities should be oriented towards a more cooperative approach.
- In the VAT practice area, the tax inspection is composed of two stages: The first stage is represented by a “formal audit”, with the objective of checking that the accounting and bookkeeping requirements have been fulfilled. In particular, checking the VAT registers (input and output VAT and invoices), as well as the VAT returns. The second stage is represented by a “substantial audit”, with the objective of checking the behavior of the tax payer when determining the VAT due, as well as the correctness of the amount due. During the tax inspection, the Tax Administration may use computerized control systems, irrelevant of the type of accounting methodology implemented by the taxpayer.
- The Tax Administration adopt different audit methodologies: (i) direct proof of falseness/evasion, negligence in the accounting and/or incompleteness in the accounting or in the general fulfillments; or, (ii) other different data and informative items that provides a basis for additional presumptions (so called “indirect presumptive items”). At the end of the inspection the Tax Authorities compile a tax audit report, whereby possible points of challenge are argued.
- In case of a tax audit report, a mitigation mechanism is in place for the tax payer in order to accept the assessment and to reduce potential penalties.
- A typical VAT audit in Poland is divided into three stages: During the pre-preparation stage the company is informed of the upcoming audit, so that it has from 7 – 30 days time to prepare for the tax control (to complete the required documents).
- Foreign entities are obliged to prepare a Polish version of foreign materials which the inspectors may be interested in. In the “explain the facts stage, the tax inspector will review tax documentation (e.g. VAT registers, sales and purchase invoices, agreements, etc.). At the final stage, the company will receive a control protocol and further tax proceedings, whereby the company may submit a clarification and also report doubts about the protocol within 14 days of receipt of the protocol.
- In practice, VAT audits related to refunds of VAT occur very often – such tax control takes place in cases when an entity applies for a VAT refund (for instance, foreign companies registered in Poland for VAT purposes applying for VAT refund of amounts more than 1 million PLN (proximally Euro 225.000) can be sure of starting a tax control).
- The Polish Tax Authorities may initiate an electronic VAT audit, with the aim of a detailed verification. Recently, such complex electronic tax audits are starting to be performed by the Tax Authorities.
- The scope of a VAT audit in Spain normally comprises of the provision of the Input and Output VAT books, as well as copies of the invoices recorded in those VAT books.
- It is more likely that VAT Audits are opened for companies that are in a regular net receivable position.
- Due to the Spanish difficult economic situation, the Tax Authorities are now more severe in the analysis of the business activities performed by the companies and whether they are entitled to obtain the VAT refunds requested. Likewise, the Spanish VAT Authorities are now checking more in detail whether the invoices received are compliant with the Spanish invoicing requirements to be valid for deductible purposes.
- VAT audits do not tend to be aggressive or confrontational and typically the VAT inspectors work together with the tax payer in a joint manner. The outcome of an audit is, for example, typically communicated prior to closing the audit. In general, the Dutch Tax Authorities announce their visit in advance, although they have the competence to drop by unannounced.
- The focus of a tax audit can vary as a tax audit is often not limited to VAT and can also include other taxes. The Dutch Tax Authorities typically focus on fulfilment of obligations regarding the administration and whether there is correlation between the administration and the VAT returns. The scope of a tax audit can range from looking at all aspects of the business to one particular part of the business or even one particular aspect of VAT.
- Usually, the Dutch Tax Authorities indicate which part(s) of the administration will be audited. In addition to the data included in the VAT return, the inspector can use data from other sources (e.g. invoices and data received from other companies) and he may use data from the ERP system of the audited company. If large companies are audited, the Dutch Tax Authorities does not always audit all individual transactions, but can carry out spot checks.
- VAT audits do not have a particular frequency. If an audit does take place, it often covers a period of several years.
- Underpayment of VAT discovered in a VAT audit can trigger penalties and interest. There are ranges of penalties and opportunities to mitigate the level of the penalties imposed.
- VAT audits do not tend to be aggressive or confrontational, particularly where large businesses are concerned. The UK Tax Authorities are supposed to take a collaborative approach.
- VAT audits do not have a particular frequency. HMRC use a risk rating to decide when to carry out audits with the focus being on those businesses that are perceived to present the greatest risk. A business that pays VAT late, files returns late, has a history of making errors or has a poor history of compliance is more likely to receive a VAT audit.
- The focus of an audit will vary – it can range from looking at all aspects of the business to one particular part of the business or one particular aspect of VAT.
- The UK Tax Authorities do use some data analysis. The Authorities would normally let the business know in advance if a data download is required.
- There is now a new penalty regime in place in the UK in relation to VAT errors. It is very different from what was in place before and potentially means that an underpayment of tax of any size can trigger a penalty even if it is disclosed to the authorities – though there are ranges of penalties and opportunities to mitigate and remove penalties.
Due to our daily involvement in VAT audits, our experts have significant experience assisting clients during the whole procedure of such a VAT audit and they would be happy to support you.