Trends in VAT Audits – EU Focus on E-commerce

Continuing our series on VAT audits, we take a closer look at the trends we’ve seen emerging in the activities of the EU Member States’ independent tax administrations throughout the European Union.

In a recent report from the European Commission (EC) specific guidelines were published not only on best practices but also on how EU Member States can harmonise the focus of their VAT audit projects. We’ve seen a significant shift away from scrutiny of historically complex businesses in sectors such as automotive and chemicals to the other sectors such as online retailers and distance selling.

The report released by the EC in April noted that there should be a conscious effort from the local tax authorities to increase the efficiency of audit practices and outcomes, by indicating how complex projects can be directed to solve industry specific issues.

Speaking about EU Member States they noted:

“They should also put in place more complex audit projects (for specific groups of taxpayers, an industry or a line of business such as retail, to address a particular risk or to establish the degree of non-compliance in a particular sector) and perform comprehensive audits and fraud investigations.”

VAT audits across Europe

We’ve seen this already happening in some countries, such as the Netherlands and Germany, with a greater shift towards auditing of previously neglected companies in the e-commerce industry as a result of Brexit and the E-commerce VAT Package implemented in July 2021. Our own audit team here at Sovos has seen a 45% increase in audits opened on our e-commerce clients in the second half of the year – driven both by changing activity post-Brexit and the One-Stop-Shop (OSS) regime commencing.

Looking in more detail at different tax administrations’ approach to auditing, we’ve observed a greater focus in VAT refund audits in the Netherlands, whilst Germany has scrutinised e-commerce retailers on more specific matters. These polarisations both reflect the individual interests of EU Member States and also the activities of the businesses operating across the EU, but it’s clear that the tax administrations in all countries are taking note of the importance of conducting audits to close the VAT gap.

It’s recommended to involve administrative agencies and governmental bodies to assist with the more complex audit projects embarked upon by EU Member States. With changes to how goods move cross-border between the United Kingdom and the EU taking centre stage in 2021 there has been an increased importance placed on the information transfer between customs offices and their tax administration counterparts. As mentioned earlier, the implementation of the OSS regime has led to a greater shift in the reporting of e-commerce businesses operating in the EU and the impact on the audit process is yet to be revealed.

It’s clear that the major shifts in the VAT landscape in 2021 created a different set of challenges for businesses and tax administrations but encouraging accurate record keeping is still a central goal of most EU Member States. In our next article in this VAT audit series we’ll explore the common triggers of a VAT audit.