VAT number validation in the European Union
It is possible to check the syntax in SAP, the VAT number format, including the number of positions. However, it is not possible to check whether the VAT number is valid. That could result in substantial tax risks that our KGT add-on avoids.
During VAT health check assignments, KGT always checks the validness of the VAT numbers. In practice, it appears that 5 to 25 percent of the existing VAT numbers in the customers and vendor master data were incorrect or invalid.
From a VAT perspective, this is a material tax risk area as the 0% VAT rate might have incorrectly been applied, and the risk amount involved would most likely exceed the company's risk appetite. That especially applies when cross-border transactions are part of the ordinary course of business. It will therefore be an area of investigation during a tax audit.
An important control measure in terms of material indirect tax risks is checking whether the 0% rate is correctly being applied. A prerequisite for using the 0% rate for cross-border transactions within the European Union is a valid VAT number of the client. The invoice must also mention a valid VAT number. Adequate monitoring of this is crucial to eliminating risks as much as possible.
The number of incorrect VAT numbers is close to 25%. That implies material risks that exceed every risk tolerance (0 percent, client acceptance about preventing VAT fraud) from a VAT perspective.
If not correct, the tax authorities might seek to recover the tax due from this supplier via a levy of a tax assessment. If the applicable VAT rate is 25%, the tax assessment will be 25/125 of the consideration charged. The assessment raised will be increased with interest and penalties to determine the total tax burden. The outcome could be used as supportive arguments for writing a problem statement and business case.
The KGT add-on can automatically check the VAT numbers when a VAT number is added to the customer master data. A real-time link to VIES is made to validate the entered VAT number. The client can choose to treat the result of the VIES validation as:
- An “error”: it is not possible to enter invalid VAT numbers in the customer master data or
- A "warning": invalid VAT numbers can be entered but are reported separately: check with the customer and correct. VAT numbers can expire or change due to changes in the legal structure of customers
It is, therefore, important to periodically check the validity of the VAT numbers. In the KGT add-on, it is also possible to regularly carry out these controls as detective controls within the Tax Control Framework. You can do that in a fully automated process.