In Germany, VAT special audits (Umsatzsteuer-Sonderprüfungen) are conducted by tax authorities to ensure compliance with VAT laws. These audits can be triggered by various factors and have significant implications for businesses. Here is a detailed overview of the purpose, process, and what businesses can expect during a VAT special audit.
Purpose of VAT Special Audits
The primary purpose of VAT special audits is to verify that taxable transactions are accurately reported and that VAT is correctly accounted for and paid. The audits aim to:
- Ensure that VAT exemptions and reductions are not improperly claimed.
- Verify the accuracy of input tax deductions.
- Identify any discrepancies between reported VAT and actual transactions.
These audits are conducted in accordance with §§ 193–207 of the German Tax Code (Abgabenordnung – AO).
Common Triggers for a VAT Special Audit
Several factors can trigger a VAT special audit, including:
- High input tax claims, especially if they are unusually high relative to output tax.
- Significant differences between monthly VAT returns and annual VAT declarations.
- Transactions involving goods or services with different VAT rates.
- Business relationships with entities previously flagged for irregularities.
- High intra-community acquisitions or sales within the EU.
- High input tax deductions in the context of new business establishments.
For startups, initial audits (Erstprüfungen) are common to ensure that the business is set up correctly for VAT purposes and to catch any early errors in bookkeeping.
Audit Process
- Audit Notification:
- The business receives a formal notification of the audit at least two weeks in advance. The notification includes the audit’s scope, the period under review, and the assigned auditor (§ 196 AO).
- Preparation:
- Businesses should prepare by gathering all relevant documents, such as VAT returns, invoices, receipts, contracts, and bank statements. It’s essential to have documents like proof of export, import VAT certificates, and correctly formatted invoices ready. Proper documentation is crucial for a smooth audit process.
- Audit Execution:
- The audit is typically conducted on-site at the business premises, though it can be done at the premises of a tax advisor or at the tax office if necessary (§ 6 Betriebsprüfungsordnung). The auditor will examine financial records to ensure compliance with VAT regulations. Specific areas of focus might include the correct application of VAT rates, proper documentation of intra-EU transactions, the validity of input tax claims, and formal correctness of invoices and export proofs.
- Conclusion and Reporting:
- After completing the audit, the auditor will discuss the findings with the business in a final meeting. If discrepancies are found, a formal audit report will be issued, and the business may be required to make adjustments or pay additional VAT. Businesses have the right to respond to the audit report and can appeal any decisions they disagree with within a specified period.
Common Areas of Examination
During a VAT special audit, auditors will closely examine several key areas, including:
- Correctness of Invoices: Ensuring all invoices meet the legal requirements (§ 14 UStG) with correct VAT amounts and necessary details.
- Proof of Export: Verifying that proper export documentation is in place for zero-rated exports (§ 4 Nr. 1a UStG).
- Import VAT Certificates: Checking that import VAT has been correctly declared and paid, and that the corresponding certificates are available.
- Input Tax Claims: Validating the legitimacy and accuracy of input tax deductions claimed by the business.
- Inter-Community Transactions: Ensuring that intra-EU transactions are correctly documented and reported, particularly the application of the reverse charge mechanism.
Preparing for a VAT Special Audit
To minimize the risk of issues during a VAT special audit, businesses should:
- Maintain accurate and up-to-date financial records.
- Ensure that all invoices and receipts meet legal requirements.
- Regularly reconcile VAT returns with financial records.
- Use reliable accounting software to manage VAT documentation.
- Seek professional advice to handle complex VAT matters and to prepare for potential audits.
Conclusion
VAT special audits in Germany are thorough reviews conducted to ensure compliance with VAT laws. By understanding the triggers, process, and preparation steps, businesses can navigate these audits more effectively and minimize potential disruptions.
For assistance with VAT compliance and preparing for VAT special audits, please contact us at WW+KN, a Baker Tilly Company, via email at info@vat-germany.com.
