How confident are you when it comes to filing VAT returns?
The majority of digital business owners we talk to find that EU VAT filing is a daunting process. Currently there are (still) 28 member states in the European Union and each has its own rules when it comes to VAT regulations.
This means that mistakes with VAT filing are all-too common. This can be a huge headache for your business if you fall into one of these traps because, of course, the tax authority is going to want you to make up for it somehow!
There are possible penalties involved and these may be applied if the tax authority believes that you’ve either been careless or deliberately tried to mislead. These penalties usually take the form of additional payments, which can be crippling to a small digital business.
As they say, “forewarned is forearmed,” so let’s take a look at a few of the common VAT filing mistakes you should look to avoid.
#1. Timing of Filing
This is often where confusion begins for digital businesses; if you’re selling goods in more than one EU member state, it can be tricky to know when the VAT filing is due. Some countries require quarterly payments, some monthly, while still others have certain exemption rules that allow an annual filing.
As an example, Germany requires quarterly returns for sales of EUR 1000 to EUR 7500 per annum, monthly for any higher or, for newly registered companies, a monthly return for the next two years.
Most countries now expect electronic filing and each have different due dates in place.
This is where we suggest that you avoid DIY filing unless you feel you are competent in dealing with the different requirements. As a digital business, you have the option of using a OSS (one-stop shop) if you sell in EU member states where you are not established.
For those who want service in an English-speaking country - see why you might want to look for a OSS in Ireland here.
#2. Poor Records
There’s a reason why we like to find ways to make taking care of the bookkeeping easier; poor record keeping is a huge issue when it comes to VAT mistakes.
Here’s what you need to remember:
- You need purchase invoices for any VAT you are claiming.
- Keep full records of all sales, including VAT ID of the customer. Missing sales is a common mistake.
- Make sure you are not mixing NET or GROSS figures up - this is another common record-keeping mistake.
The best thing you can do? Keep up with your bookkeeping by reconciling weekly.
#3. Incorrect “Tax Point”
What does “tax point” mean and why is it important? According to the UK Government, tax point (or “time of supply”) means the date the transaction takes place for tax purposes. This is important because you need to ensure that transactions are included on the correct return.
A common mistake is when supply of goods takes place near the end of a tax quarter. This can mean they end up on the wrong return. As a quick guide, see the screenshot taken from UK Government information below:
#4. Business vs. Personal Supply
Whether it’s due to poor record keeping or genuine mistake, there are many mix-ups with the rules around what is required to be taxed (“VAT taxable supply”), and which transactions you can claim back VAT on.
Here are a few examples:
- VAT on entertaining clients usually cannot be claimed back, although services supplied to an employee can. The thing to watch here is if the employee was entertained with a non-employee, it may be a split scenario in terms of what is claimable.
- If you purchase services for your business then put them to personal use, they may be deemed to be VAT taxable supply, in which case you need to account for VAT.
- If you use something for both business and personal use (a phone is a good example), the claimable VAT is only on the business portion and calculated by percentage of use.
- In some scenarios, goods you produce or sell in your business are still considered VAT taxable supply if used by the business. “Taxable self supplies” might include items such as cars used for business purposes in a motor vehicle dealership business.
There are a number of other conditions and scenarios to be aware of so it’s a little wonder this is an area commonly prone to mistakes! Again, we’d go back to keeping very good records of everything so at the very least, your accountant has an easier job reconciling (and you save money on the bill!).
#5. Incomplete Invoices
Correct invoicing is a big deal when it comes to VAT. Different countries have their own rules as to what is acceptable, but all require that invoices are complete as per their standards.
For example, you may need the following information:
- Your business VAT registration number.
- Your business name and contact details.
- An invoice number that is sequential - no unexplained gaps.
- Customer name and address.
- Invoice date, also the tax point date if this is different.
- Itemized description of goods or services.
- VAT rate used.
- Total before VAT.
- Total including VAT.
Any duplicate or pro-forma invoices must be clearly marked to avoid being counted twice. This is another mistake, which happens frequently.
#6. Wrong Rate Used
This is something that comes up, especially for digital businesses who don’t have the right tools in place to automate the VAT invoicing process. Digital businesses have been caught by not charging VAT at all, applying the same rate to all or attempting to manually invoice customers and calculate rates based on location.
If you’ve used the wrong rate, and more VAT should have been collected, it’s up to you to recover and pay it, something digital businesses are unlikely to recover from customers. If you’ve collected too much, you owe the customer a refund.
Incorrect use of the zero rating clause is another issue. If a customer is within the EU, then VAT must be charged no matter what your country of residence is. If the customer is outside of the EU and you are EU-based, then VAT is not required to be charged (zero rated), but you must be able to show evidence that the customer is based outside of the EU.
#7. Dealing With Exemptions
The examples given earlier under Business vs. Personal Supply are just a few of the tangles that businesses end up in. There are many situations where exemptions or partial exemptions exist. Filing VAT correctly gets especially tricky if the business makes both taxable and exempt supplies.
There’s really only one thing for it in these instances; get professional advice. It’s almost always better to spend the money on a good accountant now rather than have tax penalties to pay later.
#8. Bad Debt Relief
Most tax authorities worldwide provide some kind of relief for bad debts. In the case of VAT, you just need to remember when it is the appropriate time to claim it.
You can’t claim bad debt until 6 months from the payment date. If, on the other hand, it is you paying creditors late, the relevant tax authority will expect you to adjust your input VAT accordingly. You can’t claim VAT on invoices you haven’t paid.
#9. EC Sales List
Do you sell goods or services to other VAT registered traders? If so, you may be required to file an EC Sales List with your VAT returns. This is a supplementary requirement if you sell across EU borders and is something that is often mistakenly left out.
The EC Sales List provides details of the sales or transfer of goods to other VAT registered businesses. It is used as a checking measure by tax authorities to ensure VAT is correctly reported by all parties.
It’s true, VAT is certainly not the most simple thing in the world to deal with, which means there are often genuine mistakes made by businesses when filing.
Be aware of some of these common mistakes and keep clear, up-to-date records so that it is easier to get the right information together at filing time.
To ensure you maximise what you can claim and submit correct returns, we strongly suggest you seek the assistance of a trained professional. There are many nuances that business owners won’t necessarily know, especially if you sell across EU borders.
Need a solution to ensure correct VAT is charged on every sale? Check out Quaderno’s beautiful invoicing, with compliance across several countries.