Our previous articles covered audit trends we have noticed at Sovos and common triggers of a VAT audit. This article discusses the best practices on how to prepare for a VAT audit.
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.
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:
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.
The advantages of preparing for a VAT audit can be summarised as follows:
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.