Late VAT Registration
Establishing the VAT compliance framework for any type of business liable to be registered for this type of tax is of foundational importance to developing a successful, credible, and financially sound business practice. Various factors determine the difficulty level in establishing a step-by-step VAT-compliant business environment.
Some of the key factors that each business owner needs to review regarding VAT before entering into the business are the threshold registration requirements. The rules and requirements are structured through domestic legislation for businesses that operate exclusively within national boundaries. However, for cross-border businesses, the extension of the review of legislation surpasses the national boundaries and moves beyond (Taxation and Customs Union; Cross-border VAT).
Finding the expected information based on the specific questions regarding VAT could be very challenging. The reviewing process of different pieces of legislation could be highly time-consuming, and it doesn’t necessarily mean that the interested party will find the right information (Cross-border VAT). Finding and understanding information concerning thresholds, VAT requirements, reporting, and different timelines is very demanding.
The business owner who hasn’t responded to the requirements specifically designed for his type of business and/or business activity could bear unnecessary penalties. The obligation to register for VAT and the consequences for late registration call for specific attention (Taxation and Customs Union).
Understanding the VAT registration threshold and the timeline for mandatory registration when the conditions are met represents one of the first pivotal requirements that businesses need to be aware of to avoid late registration penalties and other possible repercussions for not being registered when they should have been.
Free VAT Compliance Guide
Ensure your business stays VAT-compliant with our essential guide. Learn how to navigate VAT regulations, avoid costly mistakes, and streamline tax processes.
✅ Understand VAT fundamentals
✅ Simplify registration and compliance
✅ Avoid common VAT pitfalls
✅ Stay updated on regulations
There could be different causes for late VAT registration. There is a strong link between the type of “behaviour” that led to late registration and the late VAT registration consequences.
Common VAT mistakes that lead to late registration include a lack of awareness of the registration threshold and what requirements or conditions define it.
When a business fails to register in due time, it triggers late registration and filing penalties and interest. VAT compliance errors that start with late registration will probably result in different types of obligations and penalties for the business.
Businesses that haven’t registered for VAT within the stipulated time can remedy this situation through backdated VAT registration. Backdated VAT registration will probably trigger the obligation to pay a late registration penalty and/or penalties for late filings (Taxation and Customs Union).
In many jurisdictions, the VAT law differentiates between businesses that have submitted the necessary documentation for VAT registration(backdated) on their initiative and businesses that have been found(through audit or similar) to haven’t registered for VAT when they should have.
In most cases, the backdated VAT registration bears the following obligations:
- Submission of necessary documentation for VAT registration(according to the VAT law);
- Payment of the penalty for late VAT registration;
- Submission of backdated VAT returns(from the date the business was registered or it should have been registered);
- Late payment penalty and/or interest.
Tip: To avoid late registration, get familiar with specific threshold rules before starting your business activity in one or more jurisdictions. If you see this from the business perspective as a highly demanding task, acquire the services of a tax advisor who will share their expertise in this subject.
In the cases when you have discovered that your business should have been registered from date X, but you haven’t process the mandatory registration(from different reasons) to ease the scope of potential repercussions it’s always advisable to consult a skilled tax person that will plainly explain you, what is the best path to follow taking into considerations the particularities of your business.
Incorrect VAT Calculation
Having a proper understanding of VAT rates isn’t just a subject of relevance for establishing appropriate compliance with the VAT system. Still, it’s critical for developing sound financials within the firm. The incorrect attribution of the VAT rates, wrongful calculations due to some other reasons, such as, e.g., technical faults of the used software solution, incorrect definition of tax base, could lead to a series of legal complications, which will probably lead to payment of penalties and interest (Taxation and Customs Union).
Other consequences of wrongful calculations include reputational damage, customer loss, and additional expenses for acquiring services from third-party providers.
One of the first acknowledgements that each business owner should have is that tax compliance is required. It calls for attention from the first days after entering the business market. The awareness of the tax requirements that your type of business needs to follow isn’t something that can be delayed for a long time, or in some cases, it isn’t something that can be prolonged at all.
If one were to ask a tax advisor how to avoid VAT penalties, the most probable answer would be to pay attention to your tax compliance requirements from day one.
Incorrect VAT rates applied for the made supply will impact different parts of the procedural VAT requirements that businesses should follow. Proper VAT calculations are inseparable from each business’s appropriate financial accounting and control management. Charged VAT by the vendor, transfers the liability for collection and remittance of the output tax to the tax authority.
An incorrect VAT calculation will most likely deprive the revenue authority of the expected tax. For businesses that operate internationally, attributing the correct tax rates for made supplies is even more critical. Wrong calculations could lead to the postponement of imports, deterioration of the business relationship with the customers, and the possibility of double taxation (Imports and exports).
Implementing the proper VAT calculation system cannot be defined as merely a technical requirement of the taxable person; it goes much further; it implicitly influences the business relationships with customers and is unquestionably important for sound financial management.
Tip: To reduce VAT calculation errors, taxable persons should implement flexible, up-to-date, and software-based tax engines. Alongside the technical solution, tax managers should establish continuous VAT training programs for their personnel. Reducing manual processes and shifting to more automated, software-based solutions are particularly important in the fast-paced business environment.
Failure to file VAT returns on time
Submitting VAT returns on time will likely result in the business’s need to pay late filing and late payment penalties. In many cases, if the company fails to submit and pay owed VAT within the prescribed time, it will receive a VAT tax assessment notice, indicating the probable calculation of owed VAT for the prescribed accounting period (Taxation and Customs Union).
The amount of penalty will depend, on most occasions, on the following factors:
- The accounting period chosen by the taxpayer
- The amount of time passed since the due date
- The amount of tax payable
The taxpayer who hasn’t filed the VAT return within the prescribed period should be aware that in many countries, besides the obligation to pay the penalty for late filing, the taxpayer will also need to pay the interest on the penalty for late return submission (Taxation and Customs Union).
In many jurisdictions, tax law mandates the obligation to pay interest on top of the penalties for late return filing and related payments. Late payment interest is calculated from the day after due, following the national framework for interest calculation governed by the national central bank (Cross-border VAT).
As indicated in the explanation above, VAT return filing mistakes will likely result in taxpayers paying various penalties and interest for this non-compliant behaviour.
Tip. To minimize errors that could lead to potential late submission of VAT returns and late payments, the registered business should implement a robust tax-compliance solution that, besides other automatic operations, will notify the responsible VAT compliance manager of the duty to submit a return in the due period.
One key trait of digitalized tax solutions is the automatic submission of VAT returns within prescribed periods previously determined by the responsible individual. Using one or more tax tools becomes foundational for tax compliance, depending on the number of countries where the responsible taxpayer operates.
VAT Record-Keeping Practices and Audits
Registered businesses should be aware that implementing the record-keeping system is one of the foundational parts of being “treated” as the Compliance economic operator. The requirements for the record-keeping system are defined under the domestic VAT regulations (Record keeping (VAT Notice 700/21).
Countries have significant differences regarding how businesses are mandated to keep tax records. Some countries mandate certified software systems, while others allow businesses to choose between traditional or electronic systems (Keeping VAT records).
However, business records should always be complete and up-to-date, and provide the correct output and input tax calculation. The default additional types of records for VAT-registered businesses are to follow the record-keeping requirements of all accounting documents upon which the VAT calculations are based.
The pre-defined requirements for VAT ledgers(sales and purchase books) and record-keeping requirements for transaction data extracted from VAT invoices should be considered when reviewing the VAT rules of the jurisdictions where the taxable person should register.
As previously mentioned, VAT-registered businesses should keep and preserve tax records that are specifically indicated in a manner stated by VAT law. In most cases, the taxpayer could use a software solution for record-keeping purposes (Record keeping (VAT Notice 700/21).
Based on the domestic VAT requirements, there are various distinguishing features concerning the record-keeping requirements for obligated businesses. Poor VAT record-keeping, could pose many challenges for a taxable person. In the cases of the tax audit carried out by the tax authorities, a lack of mandated documents could trigger penalties. Regarding a lack of business records for vendors or customers’ business transactions, the business in question could lose the possibility of claiming input tax credits or the inability to issue a credit or debit note(based on an non-accurately stored original invoice).
Tip. To reduce errors that could arise with manual VAT record-keeping practice, as well as intrinsically connected consequences(losing the possibility of VAT reclaim, audit trail, and other issues), the shift from manual to software-based solution is highly recommended. The comparison has clearly shown that software-based solutions reduce the quantity of errors, are less costly, and long-term investment pays off (Keeping VAT records).
Using an erroneous storage and archiving system for tax-related requirements will increase the VAT audit risks and compliance.
Challenges with Cross-Border VAT Requirements
In the previous chapters of our VAT guide, we addressed many pieces of the puzzle that together form a big part of the VAT compliance framework for responsible taxable persons. Now, we will review challenges that come across the path of vendors or buyers who participate in cross-border transactions.
Considering the complexities of cross-border transactions, many types of cross-border VAT issues need to be addressed to navigate the VAT transactional maze compliantly.
Reverse Charge
The reverse charge mechanism represents a specific VAT concept for accounting for the tax for the supply in question. The adherence to this system allows or mandates the transfer of the VAT liability from the supplier to the purchaser of goods or services. Its primary purpose is to decrease the amount of mandatory VAT registrations for suppliers that aren’t established in the country where the goods are supplied/delivered or the service is provided.
The reverse charge mechanism covers most of the supplies made within the EU for B2B transactions. There are also situations where a domestic reverse charge mechanism is in place. The cross-border reverse charge mechanism isn’t adopted in all EU countries, and it isn’t adopted in all VAT countries globally (Cross-border VAT).
There isn’t a globally accepted reverse charge mechanism that addresses the same types of transactions or the exact scope of taxpayers. This is one reason why businesses are prone to reverse charge VAT mistakes.
Tip. To avoid possible mistakes connected with the reverse-charge mechanism, the business should review the local tax provisions country by country. When mandated, wrong usage or non-usage of the reverse charge mechanism leads to improper VAT accounting and incorrect filings.
Import VAT
Businesses that make cross-border supplies of goods or services have, in most cases, the necessity to be aware of the customs rules and regulations. It should be emphasized that when it comes to collecting import VAT and customs duties, the responsibility belongs to customs authorities, not tax authorities that manage VAT collection.
Suppliers who sell to EU customers should be aware of the responsibility of the customs authorities. In general, Value-Added Tax (VAT) is payable at the point of importation into the State on all taxable goods dispatched from outside the EU and entering the EU customs territory, which should be taxed with import VAT and customs duties.
Imported goods are generally taxed at the same VAT rate as goods in free circulation in the country where they are imported. The import VAT and customs duties shall be imposed following the general rule that states the import tax and duties shall be imposed at the point of importation. However, there are cases where the final customer is based in a second or third country since the point of importation into the EU, and then different customs rules apply (Imports and exports).
The business owner should know that customs rules and regulations represent a distinct law and tax area. A good knowledge of VAT rules and their collection for in-state supplies doesn’t automatically lead to awareness of the rules established around import taxes.
Many points are confusing for business owners operating across borders. Some of the most repetitive questions that our clients raised cover the definition of responsibilities for import VAT and customs duties, how to use the IOSS scheme and decrease compliance costs, and how the customs value of a product(taxable base) is determined.
Tip. Customs rules and regulations are very complex. The consequences of incorrect calculations, erroneous customs declarations, and invalid invoices could result in a slow customs clearance process, the impossibility of delivering the product to the customer, and returns. Awareness of the customs rules is important before entering into cross-border transactions. The practical tips, knowledge, and understanding of the rules are more challenging than the requirements for businesses that operate exclusively within their borders.
Slow delivery, slow customs clearance, potential penalties, and bad organisation with third parties(logistics and service providers) could lead to a loss of credibility with customers.
Distance Sales
The eCommerce package introduced by the EU Commission, which came into force on July 1, 2021, reshaped the indirect tax framework rules for B2C intra-EU transactions. The tax provisions introduced new rules for intra-EU distance sales of goods and supplies of low-value goods dispatched or transported from outside the EU (Taxation and Customs Union).
The adopted package that reshaped the indirect tax framework introduced entirely new schemes applicable to distance sales of goods and services. One of the primary goals concerning suppliers and customers was to reduce vendors’ compliance costs, streamline the sales process, and reduce the customs clearance procedure. Introducing the simplified One-Stop-Shop(OSS) schemes was a game changer.
Registration for one or more of the OSS schemes drastically reduced the number of VAT registrations for businesses that operate in more than one EU Member State. Tip. The usage of one or more OSS schemes significantly reduces the expenditure that SME’s or even digital platforms need to allocate for compliance purposes. Each OSS scheme has its specifics, rules, and regulations. The business owner needs to be aware of the rules before deciding to register for one or more. It should be noted that the registration for the simplified scheme eliminates the possibility of VAT reclaims, as it is a pay-only type scheme.
Free VAT Compliance Guide
Ensure your business stays VAT-compliant with our essential guide. Learn how to navigate VAT regulations, avoid costly mistakes, and streamline tax processes.
✅ Understand VAT fundamentals
✅ Simplify registration and compliance
✅ Avoid common VAT pitfalls
✅ Stay updated on regulations