VAT audit and the reliable audit trail
VAT auditing is an important process for businesses, as it allows them to verify the compliance of their VAT returns and avoid financial penalties. There are several methods to perform a VAT audit, but the reliable VAT audit trail is considered one of the most effective. This article explains in detail what a VAT audit is, why it is important to perform it and how an intra-community VAT audit is performed.
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What is a VAT audit?
A VAT audit is a process to verify the compliance of a company’s tax and reporting obligations. It allows to verify if the company has correctly calculated, deducted, collected and declared the VAT due to the tax authorities. The objective of the audit is to ensure that the company complies with the tax rules in force and to avoid financial penalties.
The objective is to check invoices, VAT returns, EC Sales List (VAT recapitulative statement) and INTRASTAT (monthly statistical survey on intra-EU trade of goods), in order to verify their compliance and thus avoid a tax adjustment.
Why perform a VAT audit?
There are many reasons why it is important to perform a VAT audit, including avoiding financial penalties for non-compliance, ensuring that the company complies with tax and customs rules, detecting errors or fraud, and improving the company’s VAT management and possibly safeguarding the company’s cash flow.
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How does an intra-Community VAT audit take place?
An intra-Community VAT audit takes place in several steps. First, the auditor collects the necessary information and documents, and performs a preliminary analysis of the company’s activity to identify the risks of non-compliance. Next, the auditor conducts a survey of the company’s intra-community operations to establish its tax and reporting obligations in the various countries. Finally, the auditor draws up an audit report and makes recommendations to ensure the company’s VAT compliance.
Step 1: Collecting the necessary information for the VAT audit
The first step of a VAT audit is the collection of information. To do so, the auditor organizes a preliminary meeting with you, during which you describe your B2B, B2C and e-commerce activity in the European Union and internationally. This first step allows to contextualize your activity and to understand your business operations. The auditor takes into account the delivery of goods, the provision of services, inventory transfers, contract work, etc. This grouping of information gives a global vision of your activity and allows to determine the risks of non-compliance in terms of VAT. Thus, the VAT expert auditor can target the risk areas for further audits.
Step 2: Mapping of local, intra-community and import/export flows
During the second step of a VAT audit, the VAT expert draws up a draft report in which the VAT auditor lists all your commercial flows. This mapping of operations is organized by type or by country according to your activity. It provides you with a clear and detailed view of your business operations. This step is essential to validate with you that the auditor has fully understood the context and organization of your flows. It also allows us to evaluate the amount of work that will be required to prepare your audit report. Once this step is completed, the audit firm sends you the draft for validation before continuing the audit.
Step 3: In-depth analysis and writing of a VAT audit report
During the third stage of a VAT audit, the VAT auditor carries out the necessary regulatory research. At Eurofiscalis, upon receipt of your confirmation, we contact our agencies and partners in other Member States if you have obligations in these countries. We draw up your audit report in the form of a table ordered by flow or by country to facilitate its understanding. For each operation, we define the VAT rules, the invoicing with the compulsory mentions, your declarative obligations in France and in each of the countries where you intervene (VAT declarations, OSS & IOSS, EMEBI, ERTVA, Intrastats…), as well as the customs formalities for your import/export operations. This complete report is sent by e-mail so that you can consult the information obtained at any time. It is important to note that this step is crucial to ensure that you respect the tax obligations in force in France and in the other countries where you operate.
Eurofiscalis will conduct an audit of your intra-community VAT and all your VAT and customs declarations.
Intra-community VAT audit: The European Commission wants to increase controls
With the harmonization of the VAT directives, the exchange of goods declarations or the implementation of the OSS and IOSS Single Window for e-commerce, the European Commission wants to limit VAT fraud. In April 2022, the same Commission published a report for member countries to strengthen their VAT controls. With this report, we can expect more controls. Performing a VAT audit remains the most efficient way to be in compliance with your declarations.
What does the European Commission (EC) report say?
The Commission’s report to the European Parliament and the Council provides advice on best practice in auditing, but also on how to harmonize Member States’ audit plans. The EC asks the tax administrations of each country to increase the efficiency of VAT tax controls. The objective is to reduce the VAT compliance gap between Member States. More specifically, it asks certain countries, including France, Malta and Austria, to improve the results of their VAT controls.
EC requests to tax administrations on their VAT audits.
The European Commission gives strategic guidelines to the tax administrations of the Member States with many elements to be respected, including:
- VAT audit activity must be based on an integrated annual plan that is reviewed by senior management;
- A value added tax (VAT) audit manual must be created and used;
- Specific instructions tailored to the specifics of different industries/sectors (e.g., tourism, construction, telecommunications) should be put in place;
- The VAT audit process should be documented and monitored for quality;
- The audit activity should use specific software adapted for VAT audit purposes;
- The audit process should use technology that allows for the cross-checking of amounts reported in tax returns with information obtained from third parties on a large scale; The audit should sometimes be carried out in cooperation with other administrative bodies and government agencies.
The fight against fraud is not limited to the European Union, as the EC is requesting that Norway participate in joint audits with EU member states.
What are the reasons for controls?
Certain events arouse the interest of the tax offices such as
- A new application for registration
- A closure of VAT registration
- Important differences between several declarations
The application for VAT recovery can also be a reason for an audit. If we take the example of the Spanish tax authorities, the claim for VAT refund for a significant amount of money triggers an almost systematic control. In some countries the audit is more often carried out on the VAT recovery claim for newly registered companies.
Another event that triggers a tax audit is a cross-check. Cross-checks are carried out in two ways:
- The vertical control supplier / customer
- The control of intra-Community trade
Creating a reliable audit trail: Objectives and obligation
It is planned to make the use of electronic invoicing in secure format mandatory for all companies by 2026, and as early as 2024 for large companies in France. But for the moment, many companies continue to use mainly paper or non-secure electronic invoices. These invoicing methods do not always guarantee the authenticity of the invoice’s origin, the integrity of its content and its legibility; this is why the tax authorities are committed to verifying these conditions during income tax and VAT audits, in order to prevent any risk of fraud and make the invoicing system more secure.
Reducing VAT fraud: the objective of the European Commission and tax authorities
Invoicing is a crucial aspect of the management of any business. It is important to respect the standards and rules in force to avoid any risk of fraud and make the invoicing process more secure. Invoices issued must include the mandatory information required by VAT regulations and must be kept for a minimum of 10 years. These invoices will serve as proof to establish the reality of the company’s economic operations.
There are several methods of invoicing, but it is planned to make the use of electronic invoicing in a secure format compulsory in 2026 for all companies. However, at present, many companies continue to send their invoices mainly on paper or in unsecured electronic format.
It is important to note that invoices issued and received are subject to the same controls and standards. The tax authorities will verify the authenticity of the invoice’s origin, the integrity of its content and its legibility. Companies that cannot justify the use of secure electronic invoicing through the use of a qualified electronic signature or a secure exchange system, must implement internal controls to ensure the compliance of their invoices.
Which companies are required to maintain a reliable audit trail?
Implementing internal controls for a reliable audit trail is mandatory for almost all companies. This includes those that issue or receive invoices in paper format, as well as those that use an unsecured electronic format, such as a simple PDF file. While the use of qualified electronic signatures and EDI (electronic data interchange) is considered a secure means of issuing electronic invoices, these tools are only considered valid if they meet current standards. In the absence of any secure means of issuing electronic invoices, internal controls are therefore necessary to ensure a reliable audit trail.
Which companies are required to maintain a reliable audit trail?
The internal control that the company must put in place will aim to ensure that the objectives pursued by the reliable audit trail are respected, namely
- To ensure that the data relating to the invoice is complete and accurate, that it has not been modified, by checking in particular the presence of the mandatory information, and that it is in a legible and understandable format, not likely to be modified over time;
- Ensure that the invoice is addressed to the right person at the right time, by checking the Siret number, the K-Bis extract, the intra-community VAT number, the address, etc. of the customer and/or supplier;
- Ensure that the invoice is not processed or recorded twice by checking that the transaction has been correctly recorded, validating the archiving processes, etc;
- Ensure that the invoice corresponds to a real economic, accounting and financial operation processed in compliance with the legislation in force and that all transactions have been taken into account in chronological order;
- Ensure that any risks, particularly those related to failures in the invoicing system that result in inaccurate invoices, are taken into account, identified and controlled.
Penalties foreseen in case of a VAT audit
The sanctions applicable in the event of invoicing errors and use of legal notices identified during a tax audit are as follows:
- For supplier invoices that do not comply with the regulations, the company may risk having the corresponding VAT deduction called into question;
- For customer invoices, it is important to ensure that all mandatory information required by the regulations in force is included. Any error or omission on an invoice can lead to a fine of 15€ per infraction (the total amount of the fine cannot exceed 25% of the total amount of the invoice). However, this fine will not be imposed if it is the first infraction committed during the calendar year and the previous 3 years, provided that the infraction has been repaired spontaneously or within 30 days of the administration's request.
- In the case of transactions carried out without an invoice, companies may be subject to a tax fine of 50% of the value of the transaction (up to €375,000 per tax year). However, if the transaction has been correctly recorded, the fine is reduced to 5% (capped at €37,500 per fiscal year). It is important to note that this fine will not be imposed if it is the first offence committed during the calendar year and the previous 3 years, if the offence was corrected spontaneously or in response to the first request of the tax authorities.
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