VAT Compliance does not only save your company’s money. It also saves the money of your business customers.
Non-adherence to VAT rules – what can happen to your customer?
Incorrect invoices, a wrong rebate handling, a missed mandatory VAT registration in another EU country… These are just three typical examples of a non-adherence to VAT rules. And all these mistakes do not only affect your company. They also have an impact on your business customer. Why? Because these errors regularly mean additional correction workload. In the worst case, they may even result in a rejection of your business customer’s VAT refund.
Example 1: Incorrect Invoice Content
If you charge VAT, business customers can in general claim a respective VAT refund from their tax offices. This particularly requires a proper invoice. An invoice is incorrect if it does not contain all legally required information and/or if the information is not correct. This can for example be the case if
- the invoice is issued by the wrong supplier or to the wrong customer,
- a mandatory VAT Identification number is not stated or incorrect;
- the payable amount is not split into a net, VAT and gross amount (if VAT applies); or
- the description of the supplied services or goods is too imprecise.
In practice, particularly invoices about down payments are typical VAT traps as they often do not fulfill the formal VAT requirements.
Correction of invoices with retroactive effect?
Yes, it is possible to correct an improper invoice. Here it can however be decisive if the correction has a retroactive effect back to the time when the wrong invoice had been issued. This is relevant if the customer already claimed a VAT refund based on the wrong invoice. If a correction has no retroactive effect, he may have to pay back the initially claimed refund to the tax office. As some countries charge interest on tax (re-) payments, the customer might therefore suffer a damage interest. And the VAT refund as such can only be claimed again once the customer is in the possession of a proper invoice.
The European Court of Justice accepts a retroactive effect in certain constellations. This was decided for an invoice correction in case of a missing VAT Identification number (C-518/14 – Senatex). In the Barlis-case (C-516/14) the Court stated that a VAT refund shall not be excluded just because of a non-adherence to formalities. Basic requirement is that the case fulfills all material requirements of a VAT refund for the customer. Thereby, tax authorities have to review all relevant circumstance of the case.
However – the judgment only concerned potential mistakes as regards the service description and date of the supply (Article 226 Nr. 6 and 7 VAT Directive). It is not yet clear if these rules also apply to cases where an invoice includes wrong information about the issuer of the invoice, the recipient, the remuneration and the separately reported VAT.
Example 2: Wrong tax rate
If a supplier charges a lower VAT amount than legally stipulated, he is nonetheless liable to pay the correct higher VAT amount to his tax office. Vice versa, he owes the invoiced higher VAT amount even if the correct tax is lower.
The customer, in contrast, can only claim a refund of the correct VAT amount. Particularly, he cannot claim a refund of an incorrectly invoiced too high VAT amount even if this has been actually paid to the supplier. Thereby, both constellations include the risk of a VAT refund rejection because of an improper invoice.
It is also possible to correct these cases. Under certain conditions, the supplier may be released from this liability and the customer’s VAT refund can be ensured. However, the fulfillment of these conditions regularly means a relevant administrative effort for both the supplier and the customer. Beyond that, a correction requires that the relevant tax years are not yet time-barred.
Example 3: Wrong rebate handling
If you agree on a rebate with your customers, make sure to define the correct VAT handling. The agreement should particularly state whether the rebate is understood as net or gross amount including VAT (of applicable). If the rebate shall be a net amount relating to a transaction including VAT, it needs to be checked whether the local VAT rules also require a repayment of the earlier charged VAT amount. What can otherwise happen? Tax authorities may qualify a paid rebate amount relating to a transaction including VAT as gross amount and accordingly reduce the customer’s VAT refund.
Example 4: Changes in the supply chain
The structure of a supply chain can have a relevant VAT impact. This is particularly valid for EU cross-border supplies via a warehouse in another EU state. In this case, your company may be subject to the local VAT rules and has to be VAT registered in the warehouse state. A non-adherence may result in a double taxation both in the state where the transport started and ended. Additionally, it results in an improper customer invoice. A respective correction cannot made with retroactive effect and the customer’s VAT refund is here regularly at risk.
Summary: What can you do?
What can you do? Ensure a good VAT communication between the Tax and Sales department! Persons responsible for the invoice handling and supply chain should have a basic VAT know how and awareness. The perfect starting point to acquire such a basic VAT understanding for Non-tax experts are our E-Learnings VAT – Basic online course (with certificate) and VAT & B2B transactions (E-Learning with certificate).
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