VAT Audit Checklist: How to Prepare

VAT is complex. The consequences of VAT noncompliance can be severe. Running a self-audit is one of the most effective ways to error-check your VAT compliance and ensure you are not in breach of value added tax regulations. That is critically important, because even unintentional VAT noncompliance could lead to fines, penalties, and extended audits. Failing to comply with local and foreign value added tax laws could even lead to criminal charges. This is why you should consult with VAT experts, especially when dealing with complicated tooling VAT in multiple countries.

How do I do a VAT audit?

Usually, when we think of VAT auditing, we think of inspectors from the local or federal tax authority going through the company’s financial records statement books with a fine-tooth comb. 

That’s not something any company manager looks forward to. VAT inspections and audits are time-consuming and disruptive. And there is always the risk that an auditor will uncover past noncompliance, which could lead to additional penalties. 

However, there is a thorough and effective way to anticipate and correct compliance VAT issues before they occur (and before they get picked up by tax authorities). That is to perform a simulated inspection on your own business to assess your compliance across the organisation.

To perform an internal audit report, you will need to draw up a checklist requesting information on a range of organisational process, from invoicing systems to responsible persons and supplies made within the relevant jurisdiction. 

What details should be included in a VAT audit checklist?

VAT audits are comprehensive investigations into a taxable entity’s business operations and how it manages its VAT obligations as a VAT registered business. To ensure that you perform a mock audit that takes into account all the relevant processes applicable to your business, you should consult a VAT specialist. 

However, a VAT audit report will typically involve the following criteria, among others:

• Details of entity’s owners and (where applicable) directors and responsible officers 
• Details on how many people are employed by the business 
• Internal accounting systems
• A description of all goods and/or services supplied
• Imported goods or services
• A list of zero-rated goods or services supplied
• Company assets
• Import and export documents
• A list of goods supplied under the VAT reverse charge mechanism 

By carefully considering these and other relevant questions, an internal audit helps a business error-check internal compliance processes, including the maintenance of accurate VAT records, to help ensure that noncompliance is detected and corrected before the business faces external penalties, such as those incurred during the VAT return filing process.

Note that the precise audit criteria will depend on the location of the business and the local VAT regulations. Each tax bureau has its own specific corporate tax audit and inspection process. Businesses should therefore seek specific expert advice on the VAT requirements - and corresponding tax audit criteria - in each jurisdiction in which they have VAT obligations. 

Do internal VAT audits prevent official inspections?

Periodically performing a thorough VAT audit on your own organisation is an excellent way to identify noncompliance and remediate it as quickly as possible. An audit can also help optimise your compliance systems, preventing VAT noncompliance from occurring in the first place. 

As VAT inspections or audits are often triggered when the local tax authority detects noncompliance or an apparent VAT anomaly, a VAT audit is an excellent way to prevent intrusive official investigations of an entity's operations.   

That said, official inspections occasionally take place at random or because a business happens to operate in a high-risk sector. Moreover, there may be apparent anomalies on a business’s VAT returns even if everything is in order. It is vital to avoid incorrect VAT returns. 

However, in such cases, performing an internal audit prior to an official VAT inspection puts the business in a stronger position, with a much lower probability that any instances of VAT noncompliance will be detected. 

How many types of VAT audits are there?

There are several different types of audits, and not all audits are equally thorough. Tax authorities may be subject taxable entities to some or all of the following:

• Desk verification - These are annual verifications of a company’s income tax and VAT return. Generally, the local tax office confirms the information provided against VAT, customs, and income tax records.  
• VAT refund audits - Verification of a VAT refund claim; the audit typically covers the period specified by the claim.
• Registration checks - Spot checks to ensure a business is VAT registered as required, and that VAT record-keeping is in order. VAT registration checks are generally conducted on smaller businesses. 
• Comprehensive audits - When anomalies are detected, the tax authority will often perform a thorough audit, covering a number of years of business operations. A comprehensive audit may reveal further noncompliance, prompting an even more far-reaching investigation. 

In addition to audits to identify and penalise noncompliance, tax authorities may also initiate fraud investigations in cases of suspected deliberate VAT or income tax evasion. These are thorough criminal investigations that may include interrogating witnesses and seizing property, among other measures. 

100% VAT compliance, 100% of the time

How can you be sure that your compliance processes are robots, resilient, and fully up-to-date? VAT IT’s VAT compliance solution ensures that your business is always 100% VAT compliant everywhere you do business. It’s the most effective way to avoid fines, penalties, and an extended VAT audit, at home and abroad. 

Get in touch with VAT IT, the world’s VAT recovery and compliance specialists, for a customised VAT solution for your business.