Trends in VAT Audits – Increased Interest From the EU

A recent report released by the European Commission has stressed the need for Member States to increase the number of audits they undertake, particularly in e-commerce businesses. The European Commission specifically highlighted the need for Malta, Austria and France to make additional efforts to improve their value-added tax audit practices. They highlighted the seriousness of the issue and that the consequences of inaccurate VAT reporting can be severe. VAT audits, therefore, promote accurate reporting and mitigate fraud, and as such, they are being encouraged by the Commission.

A strategic approach to VAT Audits

The European Commission specifically stated that tax authorities should have a strategic approach which must observe multiple elements, including:

• The VAT audit activity must be based on an integrated annual plan that is reviewed by senior management;
• Specific procedures and, preferably, an audit manual should exist and be used;
• Specific instructions adapted to the specificities of different industries/sectors (e.g. tourism, construction, telecommunications) must be in place;
• The VAT audit process should be documented and monitored for quality;
• The audit activity should make use of specific software adapted for VAT audit purposes;
• The audit process should use technology that allows cross-checking of the amounts reported in tax declarations against information obtained from third parties on a large scale;
• The audit must sometimes be carried out in co-operation with other administrative agencies and governmental bodies.

The report notes some of the positive actions taken by Member States. Generally, they pay close attention to the audit process, with Finland and Sweden highlighted as particularly good. Furthermore, the report notes that some Member States have established special “VAT task forces” to deal with audits.

Following this report, the European Commission also announced that Norway should be authorised to participate in joint audits with their counterparts in the EU as a further measure to crack down on fraud.

Approach and scope of audits to be extended

E-commerce is a good example of an area that continues to grow, with the VAT stake ever increasing. With tax authorities globally struggling to keep pace with new technology and consumer offerings, local tax authorities are implementing further measures to ensure that fraud is combatted at an EU-wide level. Whether further changes occur through a difference in how VAT is reported or new forms of reporting such as continuous transaction controls (CTCs) that are in place in some Member States already, VAT audits are at the heart of this strategic plan. In this report, the European Commission has clarified that the approach and scope of audits should be extended.

With increased Member States co-operation and new measures adopted by the European Commission, such as the implementing regulation that provides details on how payment providers should start providing harmonised data to tax authorities from 2024, businesses should ensure that they have adequate controls in place to be able to handle any audit request. Future blogs in this series will focus on the audit trends we’ve noticed at Sovos and how businesses should prepare for an audit.