Getting a refund on a VAT is a tremendous challenge, one that many companies struggle to complete. Between the complexity behind the regulations and their variations based on country, businesses are prone to making VAT errors. When these mistakes happen, not only do companies lose their rebate, they also have to start the process from the beginning, which means incurring extra costs and losing more time. The best solution to needless delays is to know the VAT errors that could cost you the rebate and take steps to avoid them.
What are the most common VAT errors?
Incomplete and duplicate forms
Incomplete invoices are one of the most common VAT errors made by organisations, especially in the European Union. The EU has very specific requirements because VAT is added during a sale, including products sold online. Organisations have the unenviable task of filing the VAT documents according to the requirements of each member state. Pro-forma or duplicate invoices need to be marked appropriately so they are not counted twice.
Wrong Tax Point
A tax point is a time of supply, it refers to the date the transaction takes place. One rule of filing a tax return is listing the date that a transaction took place on. Unfortunately, most businesses make the mistake of recording the transaction date when the cash has been exchanged and not the goods themselves. When that happens, it counts as a VAT error in the EU. The purpose of the tax point is to fix the time for accounting for and claiming VAT. However, there are other reasons as well:
- Confirming if input tax should be deducted and the date it should be done
- Calculating VAT turnover for registration purposes
- Confirming the period where supplies are to be allocated for partial exemption purposes
A misunderstanding over what can be rebated
There is a misunderstanding over what is taxed under VAT and what can be rebated. Some transactions come under VAT taxable supply and have to be taxed and, therefore, don’t qualify for a rebate. The error occurs because there are several instances where transactions that fall under a VAT taxable supply and VAT refund mix. For example, VAT paid for entertaining clients cannot be claimed, but VAT paid for employee services can be rebated. However, what if there was a situation where both employee and client mingled in a non-formal occasion? Misunderstanding the conditions for a rebate is one of the common VAT errors businesses make, especially when applied in specific situations.
Using the wrong VAT rate
Applying the wrong rate is another common VAT error. Businesses have to charge the right VAT rate based on different conditions. An excellent example is the zero-rating clause – under this clause businesses based in the EU, do not have to charge VAT to non-EU customers, provided there is proof that the customer does not live in the European Union. Charging the right rate is a balancing act most businesses struggle with. Undercharging means less money rebated, and the company has to turn to the customer to make up the difference (which is not likely to happen). If they overcharge then they must provide a refund.
EC Sales List
There are supplementary reports to be submitted along with a VAT application, one of these is the EC Sales List (ESL). The ESL is a report filed on a quarterly or monthly basis; it provides information on the goods and services sold to other VAT registered traders in other EU countries. Tax authorities use the ESL to certify that all parties involved are submitting the correct reports. However, many organisations have a tendency to forget the ESL, these common VAT errors are the reason the application gets rejected.
How to correct VAT errors
While it is possible to correct VAT errors, doing so proves to be challenging.
Your best bet is for a smooth application while sidestepping errors when applying for the rebate. This can be accomplished by automating the process as much as possible with a cloud-based software solution with an invoice compliance checker. The software can scan the application for errors to minimise rejection and non-compliance errors. Along with a checker, the software also performs query handling, monitor VAT refund KPIs and the option to send invoices directly to tax administrators. Working with the automated portal reduces the chances of VAT errors, while also helping you save time, money and effort.