Top 5 risks areas for cross-border VAT

With all the advancements in technology, communication and transport that have happened over the last few decades, it has allowed businesses the opportunity to conduct cross border activities with more and more ease.

However, what comes along with that opportunity is also one of the biggest risk areas for businesses from a VAT perspective.

We have highlighted below five of the most common risk areas with respect to EU VAT and cross border transactions.

1. Understanding the VAT treatment

Not having VAT minded people within your organisation is one of more difficult areas to overcome when it comes to cross border EU VAT. It is not only a very complex area, but can also differ in interpretation and VAT treatment from Member State to Member State.

Differing rules and interpretation can mean various VAT treatments for the same supply in different Member States. Consequently, it can result in the risk of underpayment of VAT in the local country along with any associated penalties and interest.

2. Data issues

Most ERP systems tend to struggle with the VAT determination of cross-border VAT transactions which can lead to poor data. Where businesses don’t maintain quality data, this can lead to a variety of risks for VAT purposes such as; duplicated transactions, incorrectly claiming input VAT or not identifying sales invoices to be reported. These are just a few of the issues that arise due to poor data and many of which can lead to increased revenue loss or hefty penalties being imposed on the business.

As we move to increased digital records and VAT reporting, it is imperative that the data held by businesses can clearly identify all VAT transactions correctly and efficiently. Finding a solution that can appropriately identify your cross-border VAT transactions will significantly reduce the risks associated with deficient data.

3. Documentation supporting exempt transactions

Businesses often overlook the supporting documentation that may be needed in order to VAT exempt different transactions, such as exports or intra-Community sales transactions. In fact, oftentimes some businesses may not even be aware of the evidence required in order to exempt same.

This failure by companies to maintain the required supporting documentation can be very lucrative to the tax offices, as without this, the local tax office may impose local VAT on such transactions.

Where businesses fail to retain the required documentation, there could be unforeseen costs if the local tax authorities were to apply local VAT (with potential interest & penalties) to transactions that could otherwise be exempt if they held the correct documentation.

4. Input VAT deduction

Frequently with cross-border transactions, goods are imported into the EU for further distribution to the various member states. Businesses would incur input VAT in the form of VAT paid when the goods clear customs (i.e. import VAT) and the recovery of same is either via a single administration document (‘SAD’) or equivalent document issued by the customs authority.

The most common risk with respect to recovering that VAT is failing to ascertain the correct parties on the SAD document. For example, when the correct party is not listed as the importer of record on customs documentation, this can often mean that companies run the risk of rejection of input VAT recovery.

In fact, despite best efforts, often the logistics partner can fail to take note of same and instead list a different party on such documentation.

Particularly since Brexit, it is vital that businesses pay close attention to such documentation and discuss same with their logistic partners. There are certain solutions to overcome same, but getting it right from the get-go will always be better than trying to find a solution at a later stage.

5. Challenges in dealing with multiple EU Member States

When dealing with different tax offices, trying to overcome language issues can be the most difficult hurdle. Add in the complexity that various VAT declarations need to be filed on different dates, with different frequencies in various EU Member States, and you have a huge challenge on your hands.

Not having a dedicated team to keep track of all of the deadlines, VAT rates, VAT treatment, etc., can lead to many companies running the risk of failing to file on time, not filling VAT returns at all or failing to make VAT payments on time. Tax authorities can impose penalties in respect of non-compliance which can become significant, depending on the jurisdiction.

Outsourcing your businesses’ VAT compliance requirements to a dedicated team with VAT expertise and knowledge can save your business time and resources, whilst reducing the risk of non-compliance.