VAT Audit Procedures

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Factory line with cardboard boxes
Factory line with cardboard boxes (Image: endopack/iStock/Getty Images)

Even though the U.S. tax system doesn't charge value-added tax -- a broad-based consumption tax assessed on value added during production and distribution -- both small and large U.S. companies that sell goods in Europe are liable for the tax and subject to VAT audits. Although the type of information reviewed during a VAT audit differs, the procedures that VAT auditors follow are similar to audit procedures followed in the U.S.

Notice and Preparation

The tax agency for the country in which you’re doing business typically starts the process by notifying you that a VAT audit is due. For example, Her Majesty's Revenue and Customs Department oversees VAT audits for businesses selling products in the United Kingdom. The notice will identify the records and information that the agency wants to see and review, such as VAT returns for the current and previous years, output tax declarations showing VAT taxes charged, claims for VAT tax deductions and VAT tax calculation methods.

Getting Started Procedures

VAT auditors spend the first hour or two familiarizing themselves with how your business works. Orientation procedures can include one or more personal interviews, a tour and operational process reviews. Following this, the audit team moves to a private office or room, receives the records and information you gathered and begins active audit procedures. If the team requires information stored electronically, a representative from your business will remain with the team, as EU laws don’t permit VAT auditors to operate your computers.

The Active Audit Phase

Procedures in this phase work to verify that your business is charging correct VAT rates and including commissions, charges and expenses in VAT calculations. Auditors also verify that VAT deduction claims pertain to costs attributable to taxable or qualifying activities, not to costs associated with exempt or non-business activities. Common procedures include records reviews to make sure invoices display your VAT registration number and random checks to make sure VAT calculations are correct. In addition, VAT input and output audit trails verify that sales and purchase transactions support the numbers and calculations on VAT returns.

Wind-Down and Reporting

Wind-down and reporting works much like in the U.S. Auditors thoroughly review audit results, create a summary report of the visit and meet with you to discuss procedures and results. The report outlines audit procedures, findings and recommendations. If the audit uncovers discrepancies requiring resolution, the report will specify a time frame to correct the discrepancy, provide more information or file an appeal with an independent tribunal.

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