What happens during a VAT audit?

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).