Each country and jurisdiction may have different laws and requirements related to the VAT audit process. Tax authorities can carry out audits in person or by correspondence, the latter often being the case for non-established businesses in the country in question.
A business may be audited at random or because there are reasons for the tax authority to believe that there is a problem with the company’s VAT return.
Generally speaking, authorities use audits and inspections to verify the accuracy of taxpayers’ declarations, identify possible errors or underpayments, and approve refunds.
As discussed in our previous article, to understand how to best prepare for a VAT audit, it’s essential to identify the reason why the audit was initiated.
What items are needed for a VAT audit?
Although specific checklists are available depending on the country of the audit, there are several actions that a business can carry out to prepare for an VAT audit. The most important of which is to collect documents and answers in advance. Frequently requested items during an audit include:
- VAT ledgers containing details of the transactions reported
- Related copies of incoming and outgoing invoices and pro-forma for intra-community movement of own goods
- Proof of transport of the goods: Two independent items should be provided in particular for intra-community dispatches, proving the right to apply the 0% tax rate (such as signed CMR consignment notes, bill of lading, carrier invoices, insurance policies, warehouse receipts, proof of payment for the transport of the goods, etc.)
- Proof of payment of the transactions reported, with particular attention to the payment of purchase invoices and the repayment of credit notes issued to clients and customers
- Contracts with suppliers
- Description of the business activities and goods flow
It is important that records of the above-listed documents, where applicable, are kept in line with local record keeping requirements. The need to prepare these documents in advance and the ability to produce them quickly becomes essential when a company is, for example, due to request the refund of VAT credits, to submit a de-registration or has, in general, any reason to expect for an audit to be initiated.
Authorities can open a cross check of activities with the company’s customers and suppliers, which will be initiated in parallel to the audit to verify that the information provided from both sides is consistent. Therefore, it is recommended to inform suppliers about any ongoing audit, communicate any questions or clarify outstanding queries. If, for example, a correction of invoices appears to be necessary, these should be finalised already in preparation for the VAT audit.
The tax authorities may impose very short and strict deadlines once an audit is initiated. Although it may be possible to request an extension, it is not necessarily guaranteed to be granted. In certain circumstances, authorities may impose penalties for late responses. Providing a clear and understandable set of documents to the tax office queries is essential to avoid any detrimental effects.
Why it makes sense to plan ahead
The advantages of preparing for a VAT audit can be summarised as follows:
- Minimise the resources required to collect the necessary documents once an audit is initiated
- Quicker completion of the audit, avoiding the necessity to request deadline extensions and delays in receiving VAT refund, if applicable
- Ability to identify, rectify and voluntarily disclose any error that might emerge from preliminary reviews of the documents collected ahead of the audit initiation
- Potential penalties reduction
Whether a business decides to handle the audit in-house or request the support of an external advisor, it is essential to consider the consequences of the audit, especially if high amounts of VAT to recover are at stake. In the event of an audit, the main objective should be to resolve it successfully and quickly, limiting as much as possible any detrimental impact to the business.