“Trust but verify” – President Ronald Reagan used to say this on numerous occasions. This phrase seems to be a perfect piece of advice in the context of VAT and procurement transactions. Businesses frequently underestimate the importance of validating purchase transactions from a VAT perspective and the consequences may be disastrous. Incorrect purchase invoices innocently reside in the bookkeeping system until they become visible during tax inspections. But then it’s often too late to correct them. Overpayments and penalties become inevitable.
The Court of Justice of the European Union (CJEU) frequently had to decide cases where companies accepted incorrect invoices, deducted input VAT and then were subsequently required to make significant additional payments following a tax audit. PORR (C 691/17) and SC Fatorie SRL (C 424/12) are just a few recent examples.
It is of crucial importance that purchase invoices are checked by businesses for their compliance, ideally upon receipt. If any errors are discovered, corrections must be requested immediately. This is especially important for countries, such as Spain and Hungary, which have implemented a (nearly) real-time reporting obligation. Given the short reporting window (“immediately” or “within four days”) there is hardly any time for post-transaction verifications.
Trusting that an invoice received from the supplier is correct regarding the VAT treatment of the transaction in question is very risky. Vendor do commit invoicing errors. This should not be surprising as the European Union is a collection of 28 VAT systems that share some common characteristics but also have some divergent rules concerning VAT liability (e.g. the reverse charge mechanism for suppliers received from non-residents). This means that companies trading in 28 Member States must be familiar with the VAT legal framework of each EU country.
If you want to read the full story about VAT risks in procurement, please take a look at my article Getting VAT right first time can save companies expensive headaches, which was published in the European CEO this year.