Value Added Tax (VAT) is a self-declared system of taxation. Every three or six months (or once a month), all taxable persons liable for VAT must send a VAT return and pay any amounts they owe.
The Federal Tax Administration (FTA) only performs limited audits of VAT returns. The purpose of these audits is to ensure that all taxable persons are treated equally. They also serve to provide information on the correct application of the tax directives and the appropriate reporting of turnover figures, and to determine the amount of input tax payable.
Companies often state that they appreciate the fact that their accounting is assessed in a different manner.
On-site audit procedure
The VAT accountant contacts the taxable person by phone before the audit and agrees with the person in charge (and the fiduciary) on the date, place of audit, period covered by the audit and its approximate duration. The accountant will also inform the taxable person of the documents (e.g. accounts, annual financial statements, land register, copy of the VAT reports, payroll records, outgoing and incoming invoices, import and export documents, etc.) to be presented.
After the telephone call, other information can be exchanged such as the preparation of financial statements, whether taxable partner companies are to be audited, etc. The audit announced by phone will then be confirmed in writing (legal requirement).
The VAT accountant will first obtain information on the business activities, the specific and specialist features of the company, the management of the business, the number of employees and the persons responsible for the accounts and VAT returns.
Then, based on various accounting records, the accountant will check that all income has been fully reported. Such income includes: income derived from deliveries and services; the consideration derived from the sale of means of production, from private shares, acquisition taxes, and own use (for individual reasons only). The audit also covers turnover excluded from the scope of the tax and items not valued as consideration (such as gifts, dividends, and damages). Such turnover is compared to items described as consideration (turnover) that the taxable individual has declared on the VAT return. The total turnover thus determined is compared to items described as consideration that the taxable individual has declared on the VAT return. The VAT accountant will discuss any discrepancies, if applicable, and make the appropriate adjustments.
The accountant will also check the following:
- Audit of the substantive and formal accuracy of the accounts;
- Audit of turnover – random checks of invoices and receipts; correct application of the different tax rates; and comparison between VAT returns and accounts;
- Audit of input tax deductions – for example, are the input tax deductions calculated by the taxable individual correct? Is the corresponding evidence available (formal and substantive proof)? Have any necessary corrections to the input tax or to events related to own use information been deducted and reported correctly?
- The corresponding acquisition tax will be audited at the same time as the audit of expenses. Consequently, the specialist VAT accountant will also examine the evidence when the taxable person reports their tax using the net-tax rate or the flat-rate systems.
- Audit of specific elements and tax-generating events such as exchanges of services with related persons, services that have not been formally justified, change of use, mixed use, advance payments, contracts, etc.
The final report prepared by the specialist VAT accountant will be reviewed with the taxable person. He/she will provide provisional lists and calculations for subsequent payments or credit for individual items. At the end of the VAT audit, the taxable person will receive a provisional tax calculation (decision can be appealed within 30 days) along with instructions.
Items most frequently requiring adjustment are:
- unexplained and non-justified differences relating to turnover;
- corrections or deductions of the input tax not carried out;
- own use not declared (correction of the input tax), for sole proprietors;
- incorrect or lack of available evidence for the input tax, imports or exports;
- charges not justified by the business use.
Recommendation: In practice it is virtually impossible to correct errors made. For this reason, it is best to regularly consult an accountant who will draw your attention to systematic errors.
Taxable persons must ensure their accounts tally with the VAT returns reported, in accordance with the law governing VAT. This process is termed as the finalization of accounts or the auditing of the compliance between turnover and input tax. Accounts must be finalized within 180 days following the end of the accounting period. Any differences (payable by or to the taxable person) must be notified in writing to the Federal Tax Administration FTA with the 5th VAT return (called the annual compliance statement or the corrected return).