Watch out for Material Errors in International VAT Compliance

As predicted, the 2010 VAT changes, despite the best of preparation on the part of many taxpayers, have started to throw up a lot of problems, unforeseen by companies, advisers and, indeed, the tax authorities across the EU. It is the usual problem of putting theory into practice. Illustrative of this is a 59 Article Regulation issued this week by the European Commission amending, correcting and clarifying the changes effective from 1 January 2010.

Right now, where these issues arise, we are experiencing a relatively easy, if largely uninformed, ride from the tax authorities in finding solutions. We do not expect this to continue.

Every International VAT compliance review we have undertaken has identified compliance issues, whether existing ones, typically related to sales invoice compliance (something that is absolutely essential), or new ones arising from the 2010 changes where transactions do not seem to “fit” snugly into particular categories. As expected, we have even seen instances of different countries treating transactions differently – though thankfully, so far, no double taxation issues have arisen as a result.

Compliance failures can result in: -

1 UK VAT being charged on “exports” of goods and/or services from the UK
2 Non-compliance penalties
3 Interest
4 VAT problems in other countries
5 Actually, worst of all, problems with customers.

With a lot of year end work being performed at present, we recommend that: -

1 you determine the value of “zero-rated” cross border transactions, and estimate the amount of VAT that could be added if compliance is not up to scratch; and

2 if that number is material or even significant, in accounting terms, a specific cross border VAT compliance review is undertaken.

If you are not confident to perform such a review, taking into consideration that some of the issues are likely to need an understanding of VAT law and practice in other EU member states, we have developed an effective methodology which can be performed either as an on-site review, or as a desk review based on representative samples of transactions.

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