VAT Compliance Requirements: A Guide

VAT compliance is complex, confusing, administratively intensive, and…  non-negotiable, especially if you have tooling vat from multiple countries. Once a business is legally obligated to register for VAT, it must meet compliance requirements or risk penalties, surcharges, and even legal proceedings. 

Importantly, VAT compliance is an ongoing process, not something a business can attend to periodically. This is especially true now that VAT authorities are increasingly using technology to monitor VAT compliance and detect fraud. 

In an age of digital VAT returns and real-time VAT reporting, VAT registered entities need effective technology, expertise, and administrative processes to ensure ongoing tax compliance. 

Fortunately, good VAT technology can also make global VAT compliance simpler, faster, and more cost effective.

In this guide to achieving VAT compliance, we’ll explain why tax compliance is so important for any VAT registered business. We’ll also discuss the most efficient ways to become VAT compliant and successfully manage your VAT obligations over the long term.

What is VAT compliance?

VAT compliance means charging VAT and accounting for that VAT in the prescribed manner, generally in the form of regular VAT returns. 

However, let’s take a step back and consider when these requirements apply. Once an entity is VAT registered it has VAT obligations. But knowing when you must register is not always as obvious as it may seem. 

When must a business register for VAT

Businesses commonly need to register for VAT because they operate in EU member states or countries where VAT applies. In most countries, once an entity’s taxable annual turnover exceeds a specified threshold it must register for VAT. 

Most companies are aware of their local VAT threshold and understand when the obligation to register for VAT kicks in. But there are a number of other, less well-known, reasons why a company may need to register for VAT in one or more countries. 

For example, the distance sale of goods to customers in EU countries can trigger a VAT obligation. If you sell products online to customers in Europe, there’s a good chance you are obliged to register for VAT in several EU member states. (You can now also account for VAT on all e-commerce sales throughout the EU using the VAT One Stop Shop.)

Similarly, an increasing number of countries are introducing digital services VAT. If you supply electronic services, such as streaming or gaming, you could incur an obligation to register for VAT in multiple countries. 

Note that the VAT thresholds and definitions of electronic services differ from country to country, so a company’s obligations need to be assessed on a case-by-case basis.

What happens once a business is registered for VAT?

Once a company is registered for VAT it has a number of obligations. It must charge VAT on any applicable taxable supply of goods or services. It also has an obligation to account for that VAT, filing a complete and accurate VAT return within the specified deadlines. This applies in each EU country in which the entity is VAT registered.

My business is based in the USA. Do I need to worry about VAT?

As there is no VAT or value added tax in the United States, US-based companies do not incur VAT locally and there is no local VAT registration. (However, US businesses do need an effective way to manage sales tax.) 

However, that does not mean American companies never need to worry about possible VAT obligations. 

American businesses that sell online to customers in Europe may be subject to VAT if they exceed the relevant sales threshold, as outlined above. Equally, when countries implement digital services VAT, it applies to all nonresident companies, including business residents in the US.

What happens if I break VAT compliance requirements?

Breaking your VAT compliance requirements is a serious matter with potentially severe consequences. That said, there may be some leeway for first offences.

However, if you fail to account for VAT, and the local tax authority is not satisfied that you have a reasonable excuse, penalties will kick in. In some cases, a VAT surcharge period will commence. During this period, the size of the penalties will increase for as long as you fail to meet your outstanding VAT obligations. 

In addition to penalties for outstanding VAT, tax authorities may also issue fines for specific incidences of VAT non compliance, such as failing to file VAT returns on time. 

For startups and small businesses, in particular, the accumulated penalties can be hard to manage, even ruinous. Even established businesses may find it difficult to deal with the cash flow consequences of VAT penalties, especially if they are faced with interest for historic noncompliance. (And even a single incident of noncompliance could trigger a VAT inspection that could reveal previous VAT irregularities.) 

Moreover, if a company repeatedly fails to meet its VAT compliance requirements, tax authorities may suspend its operations or even permanently ban it from operating.

Considering that breaching VAT requirements poses a serious and direct business risk, companies need effective ways to avoid a random HMRC VAT inspection, accidental noncompliance, and eliminate the possibility of errors.  

VAT fraud

Deliberate VAT evasion is treated even more seriously by tax authorities. VAT fraud is a crime, punishable by imprisonment and serious fines. In the UK, there is no statutory limit on the fine for serious VAT fraud. 

How can I ensure I remain VAT compliant?

In principle, remaining VAT compliant is simple enough: always account for all the VAT owed by consistently submitting complete and accurate VAT returns within the specified deadline. 

In practice, knowing precisely what your VAT obligations are is complex, especially if you operate in multiple countries. And managing VAT is extremely time-consuming and error prone. 

Fortunately, VAT compliance technology makes meeting your VAT compliance requirements much simpler and more efficient. Automation also eliminates human error. And with a team of VAT specialists in your corner, you can be assured that you are always VAT compliant, everywhere you do business.

However, optimal VAT management goes beyond simple compliance. In order to get a competitive edge, businesses should take advantage of advanced VAT mechanisms, such as deferring import VAT to enhance their cash flow. Businesses should also take concrete steps to maximise their VAT recovery, which can significantly reduce the cost of doing business.  

The best of both worlds

Given the serious consequences of breaching VAT compliance requirements, many businesses take an overcautious approach to VAT recovery. Many businesses tend to underclaim VAT, for fear of submitting erroneous VAT returns. Understanding how to claim foreign tax credit can help prevent this from happening.

VAT IT’s integrated VAT compliance and recovery solution is the best of both VAT worlds. Our technology-driven VAT compliance service means you are always 100% VAT compliant, everywhere you do business. And our specialist VAT recovery teams are on hand to optimise your VAT compliance and ensure you recover all the VAT to which you are entitled. That means serious savings on the cost of business, domestically and abroad. 

Get in touch with VAT IT for a complete VAT compliance and recovery solution, customised for your business.