Value-added tax (VAT) is unique among high tax revenues because the self-assessment principle applies – that is, taxpayers determine the amount they owe on their own. Since incorrect information can be provided intentionally or unintentionally, the tax authority sees an increased need for verification when it comes to VAT. This is the reason for the special VAT audit. In this article, you will learn what that is, why it takes place, and what the tax office looks for. We also explain how a special VAT audit works step by step and how companies can prepare for it.

What’s in this article?

• What is a special VAT audit?
  
• What are the reasons for a special VAT audit?
  
• What issues are examined during a special VAT audit?
  
• How does a special VAT audit work?
  
• How can companies prepare for the special VAT audit?
  

What is a special VAT audit?

A special VAT audit is a unique form of business review where the tax authority focuses on VAT and related issues. As incorrect information can be provided intentionally or unintentionally, they see an increased need for verification when it comes to VAT.

It is usually ordered when a company’s tax information is conspicuous or inconsistent. Unlike a regular tax audit that examines the entire accounting system, a special VAT audit typically focuses on specific issues or time periods.

For example, the process can review the specific months or quarters for which a preliminary VAT return has been provided. Therefore, the tax office might carry out several special VAT audits on a company within a year. The legal basis can be found in Section 193 of the German Fiscal Code (AO), as well as in Paragraphs 5 to 12, 20 to 24, 29, and 30 of the audit regulations.

According to Section 27b of the German VAT Act (UStG), the special VAT audit is not the same as the VAT review. The latter is unannounced and is carried out by the tax investigation authorities, for example, if there are indications of tax evasion. They are also authorised to enter the business and its premises during normal working hours. Pursuant to Section 27b(3) of the UStG, the VAT audit could be converted into an external audit under Section 193 of the AO – however, this must be notified in writing to the businesses concerned.

What are the reasons for a special VAT audit?

In principle, a special VAT audit must be carried out, distinguishing between initial audits and those on demand. The former is usually in the company’s interest, as the tax authority wants to correct accounting errors at an early stage. According to their name, subsequent audits are carried out when necessary and when the tax authority detects irregularities. There are various reasons why they might order a special VAT audit. The most common ones are:

• Irregularities in the preliminary VAT returns: Failure to file provisional VAT returns, or failure to file them on time, might lead to a special audit by the tax authorities. Significant deviations in reported sales or input tax amounts from previous periods could also raise suspicion.
  
• Implausible information: If there are discrepancies between the reported sales and the information in other tax returns, such as income tax or corporate tax, this could be considered an indication of incorrect information. In addition, unusually high input tax amounts without corresponding sales can trigger a special VAT audit.
  
• Common corrections to preliminary VAT returns: A disproportionate number of corrections or changes to the information in the initial VAT return can also raise suspicion among tax authorities and lead to a special audit.
  
• Missing or incorrect invoices: If invoices are missing or inaccurate, a special audit is likely. Therefore, companies must ensure their invoices are accurate and contain all mandatory information required by Section 14, Paragraph 4 of the (UStG), particularly the VAT identification number.
  
• Audits and control reports: If irregularities are discovered during a general company review or an audit of business partners, this could lead to a special VAT audit. The same applies to information received from other tax authorities or third parties such as courts or notaries.
  
• New company formation or structural changes: In the case of new companies or drastic changes in the business structure, the tax office can schedule a special audit to ensure that sales tax is recorded correctly.
  
• Industry risks: Certain sectors such as construction, catering, hotels, and retail are under special observation because the risk of VAT fraud is higher here.
  

In the best-case scenario, companies do not give the tax office any reason for a special VAT audit. The prerequisite for this is proper bookkeeping and correct information and calculations. Automated processes help to reduce human errors and incorrect information. With Stripe Tax, you can, for example, automatically calculate and collect the sales tax from your sales. This means that the correct tax amount is always determined, and special VAT audits become less likely.

What issues are examined during a special VAT audit?

A special VAT audit can relate to many company accounting record issues. This includes, in particular:

• Preliminary VAT returns: The auditors verify that the preliminary declarations submitted are correct and that all sales have been properly recorded.
  
• Invoices: The audit process verifies that issued and received invoices meet the formal requirements of the UStG. This includes information such as a full address, tax number, VAT identification number, invoice number, description of service, time of service, and the tax rate applied.
  
• Tax rates: The tax office usually checks whether a company’s incoming and outgoing invoices contain tax rates and generally whether the correct VAT rates are shown. The basis for this is, among other things, Section 12 of the UStG, which lists goods and services to which a reduced tax rate applies.
  
• Input tax: Input tax is always of interest to the tax authorities during a special audit. The main question is whether the input tax deduction was applied correctly and all necessary documents are available (see Section 15a of the UStG). It is particularly important that the services purchased are used for business purposes and that the input tax amounts are based on correct invoices.
  
• Foreign business: If companies conduct business abroad, this is also of particular interest to the tax authorities. In the case of intra community supplies, the tax office will check, for instance, whether the recapitulative statements have been submitted correctly and completely. In the case of other intra community services, one of the checks is whether the reverse-charge procedure has been applied correctly.
  
• Records of private withdrawals: The tax office can also check whether withdrawals from company assets that are used privately have been correctly recorded for VAT purposes.
  

How does a special VAT audit work?

A special VAT audit usually takes place in seven steps. Here is the typical process:

• Announcement of the audit: The tax office usually announces the special VAT audit in writing at least 14 days in advance. In this letter, the tax office will inform you of the scheduled date, the responsible auditor, the period under review, and the documents to be audited. According to Section 6 of the audit regulations, the company’s business premises are designated as the place of audit. If there are no suitable business premises, the taxpayer’s home or the tax authority’s premises can be used. Other audit locations will only be considered in exceptional cases.
  
• Audit preparation: The company or tax advisor needs to find and prepare the documents required for the audit.
  
• Conducting the audit: The auditor will arrive at the agreed-upon location on the agreed-upon date to review the documents and answer any questions. The scope and depth of the audit can vary from company to company. Typically, analogue and digital documents such as invoices, preliminary VAT returns, or annual returns are reviewed for discrepancies, and accounting transactions are sampled. Queries must be answered because taxpayers are obliged to cooperate according to Section 200 of the AO.
  
• Final discussion: After the review, the auditors will inform the company of their preliminary findings and possible consequences and recommendations for action. This can be done immediately after the audit or at a separate meeting. Any discrepancies can also be explained and discussed during this meeting. Taxpayers or their representatives still have the opportunity to submit explanations or additional documents to clarify any misunderstandings.
  
• Creating the audit report: Upon completion of the special audit, the auditor prepares a written report summarising the findings and lists any objections or corrections. This report is sent to the company and other tax authorities.
  
• Tax implications: The tax office decides on any additional payments or refunds based on the audit report. If incorrect information is found, the tax office can issue amended sales tax assessments.
  
• Legal remedies: If taxpayers do not agree with the audit result, they can appeal against the amended tax assessment. If necessary, the facts must be clarified in court.
  

Special VAT audit procedure

How can companies prepare for the special VAT audit?

Business owners who have been notified of a special VAT audit must first consult their tax advisor. They are usually familiar with the process and will know what documents the tax authorities want to check.

The first step needs to be to find all the necessary documents and make them available for inspection in analogue or digital form. These include advance VAT and annual returns, incoming and outgoing invoices, receipts for input tax deductions, contracts, and other relevant documents. Stripe Tax can help because it automatically collects and reports the correct tax amounts for worldwide payments and gives you central access to all applicable tax documents.

When reviewing documents, it is advisable to check them for completeness and accuracy. For example, incoming and outgoing invoices need to contain all the necessary mandatory information, and the input tax amounts must be correctly stated. It is also key to have a receipt for each transaction. All documents must be prepared clearly and orderly so that the auditors can get a quick overview.

If you notice any omissions or errors during the preparation process, be transparent: it is best to tell the auditor right at the beginning of the special audit. Minor mistakes do not automatically result in additional payments.

It is also important to come across as a trustworthy and cooperative company. On the other hand, if you try to hide omissions and they are discovered during the special VAT review, the auditors will take a closer look.