Tax authorities take VAT non compliance very seriously. That should be no surprise. VAT is the most common indirect tax in the world and an increasingly important source of revenue.
Authorities are also becoming much more innovative in the techniques they use to detect noncompliance, from real-time reporting to advanced machine learning that detects anomalies. In addition, cooperation between agencies in different countries makes cross-border value added tax fraud harder to achieve.
This is important to recognise even for businesses that are committed to meeting their VAT compliance requirements. VAT is complex and, without effective processes in place, businesses run the risk of accidental VAT non compliance.
Failing to comply with VAT requirements has serious risks. While penalties and interest charges are the most obvious consequences of noncompliance, noncompliance poses additional serious business risks. Failing to meet the basic VAT requirements can damage a company’s reputation and prevent it from doing business.
Failure to submit a full and correct VAT return on time may lead to fines. Once a company fails to account for VAT, the federal tax authority may impose a surcharge period. During the surcharge period, the penalty owed by the company will continue to grow for as long as it fails to meet its VAT obligation.
Failing to meet your VAT obligation can trigger an HMRC VAT inspection. Inspections may be intrusive and time-consuming. More importantly, they could reveal further non compliance, which could result in additional penalties.
If a business is known to be under investigation by tax authorities, or on the receiving end of penalties, it can undermine confidence in its resilience. More dramatically, when a business is under investigation, authorities may contact your major clients or suppliers and ask for a record of their transactions with your company. This can be embarrassing and reputationally damaging.
As e-commerce has become central to the global economy, policymakers have updated VAT rules. One important innovation is to make online platforms (such as Amazon and eBay) responsible for VAT collection. In such cases, the platform may require a business to provide a valid VAT number in order to operate.
Tax authorities may ban a business from trading for a specified period of time if it deliberately fails to pay VAT. The risk of being banned from trading can affect any business, even sole proprietors.
The consequences of deliberate VAT non compliance are extremely severe. VAT fraud may be punished with imprisonment and/or unlimited fines.
If an investigation reveals erroneous invoices, or other anomalies, this could lead to other irregularities. For example, a misleading tax invoice could mean that the business’s corporate income tax returns are inaccurate.
Obviously, VAT fraud and intentional non compliance is treated particularly severely by authorities. But, as should be clear, accidental non compliance - such as missing deadlines or submitting erroneous VAT returns - can lead to large fines, reputational damage, and cash flow problems.
It’s also important to bear in mind that VAT compliance is broad, complex, and administratively demanding. Failing to submit VAT returns on time is an obvious infraction. However, there are a number of additional administrative requirements involved in complete VAT compliance, such as meeting the record-keeping obligations. If officials detect any such irregularities, you risk being penalised, even if your VAT payments are up-to-date.
Once an entity is registered for VAT, it has a number of obligations. Once VAT-registered, you need to charge VAT, submit complete and accurate VAT returns and account for all VAT owed.
So why do businesses register for VAT in the first place? While there are potential benefits to registering for VAT even if you are not required to do so, businesses generally register because they are obliged to. An entity may be obliged to register for VAT for a number of reasons. Most commonly, if your annual taxable goods or services exceed a specified threshold, you are required to register for VAT.
If you do not register for VAT when you are obliged to do so, you will be subject to serious fines, penalties, or even criminal charges. Your business may even be barred from operating.
As detailed above, businesses commonly are obliged to register for VAT if they exceed the VAT threshold of the markets in which they operate. VAT thresholds are different in each country. For example, in the UK, the threshold is £85,000. In other countries, the threshold may be lower or higher, and is determined according to the value of taxable supplies in the local currency.
However, there are also a number of important other considerations to bear in mind.
Many countries have now implemented a specific digital services VAT for non resident providers of electronic services. If a company provides services such as streaming or gaming, it may be liable for VAT registration in one or more countries in which its customers are based.
A similar consideration applies in the case of distance selling to countries. If you sell online to customers in Europe, you will, under defined conditions, have to register for VAT in one or more of the countries in which your customers are residents.
Given the complexities of VAT regulations, and the varying rules in different jurisdictions, businesses may benefit from expert guidance on their global VAT obligations.
Once registered for VAT, an entity will be issued with a VAT number. The VAT number is generally included in the VAT invoice and may be required in particular circumstances, such as when managing import VAT.
In addition to the legal requirement to register for VAT and obtain a valid VAT number, there may be compelling business reasons to hold a VAT number. For example, if you wish to sell via an online platform, the platform may demand a valid VAT number as a condition of allowing you to use their service.
In the course of submitting VAT returns, a business has the opportunity to reclaim input VAT. As companies naturally incur VAT in the course of doing business, VAT reclaim is an important way for VAT registered businesses to reduce the cost of doing business.
However, any VAT recovery claim needs to be accurate and supported by the relevant invoices and supporting documentation. If tax authorities determine that a business has overclaimed, or that its returns are inaccurate, then it will be liable for penalties. Deliberately overclaiming VAT will even open a company to criminal charges. This is why it is important to understand the steps on how to claim foreign tax credit.
It is, therefore, no surprise that businesses rely on end-to-end domestic VAT recovery solutions, supported by powerful VAT software, to maximise recovery, make VAT administration as efficient as possible, and eliminate human error.
VAT is complex but with the right systems and guidance, any business can successfully optimise its global VAT compliance.
In order to overcome the risks of noncompliance a business needs to:
VAT IT’s integrated VAT compliance and recovery service ensures there are no weak links in your VAT management. From bulletproof VAT compliance to world-leading VAT reclaim solutions, it’s the most effective way to optimize your VAT.
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