VAT considerations in auditing
In statutory audits, value-added taxation is often given only limited attention, which can result in material VAT risks remaining unidentified. However, when supported by the right expertise, the audit process presents a valuable opportunity to uncover VAT-related exposures. At Tuokko, auditors and VAT experts work in close collaboration to ensure that this opportunity is fully leveraged.
Addressing risks early is key to cost-effective VAT management
In both everyday business operations and audit engagements, VAT is frequently perceived as a neutral element without any material financial consequences. As a result, it is often given only limited attention – particularly if the auditor does not have access to proper VAT expertise. This may lead to unnoticed costs or VAT-related exposures that can escalate into significant financial risks over time.
The most cost-effective way to manage an entity’s approach to VAT and mitigate related risks is to address potential issues early – by ensuring the accuracy of the VAT treatment from the outset. Identifying risk factors and closing off potential VAT leakages before they materialize is essential. This can be achieved during the audit, provided that VAT matters are given adequate attention throughout the process. How this opportunity can be utilized in practice is explored in more detail below.
Value-Added Tax from the auditor’s perspective
VAT is encountered at multiple stages of the statutory audit process. In practice, however, its significance is often limited, and it is generally not purposeful to delve deeply into VAT considerations. The typical review of VAT in audits is usually confined to verifying the VAT receivable or payable as presented in the balance sheet against the information submitted to the Tax Administration, and to assessing the VAT treatment of selected invoices during sample-based document reviews.
Nevertheless, professional auditors should be able to recognize situations in which a more in-depth VAT assessment is warranted. This calls for a comprehensive understanding of the audited entity’s business operations and their interplay with core VAT principles, such as the right to deduct input VAT.
If there is reason to suspect that an entity’s activities involve VAT risks or unnecessary costs, it is crucial that the auditor has access to a VAT expert who can conduct a more thorough assessment. This ensures that any further investigations are justified and conducted in a timely manner. A deeper review of the VAT position often uncovers complex or interpretative issues that are not practical – or in many cases even possible – for auditors to resolve independently. The auditor’s core expertise lies in financial reporting, accounting, corporate law, and audit methodology – not in the specificities of VAT legislation.
VAT deduction as a common area of focus
VAT issues identified during audits often relate to the deductibility of input VAT. For example, if an entity does not have full right to deduct input VAT but has nonetheless deducted VAT on overhead costs in full, any reassessed VAT and penalties may result in substantial additional costs. Similarly, if the group structure has been implemented without adequate consideration of VAT implications, intra-group sales may give rise to unrecoverable VAT due to limitations in deduction rights. Such VAT leakage can often be avoided without having to restructure the group in a way that would be less favorable from other business perspectives.
Uncertainties regarding the scope of the right to deduct VAT are particularly common in certain sectors, such as financial services, construction, and healthcare and social services. Organizations that engage in both non-profit and business activities may also face practical challenges in determining the extent of their deduction rights. In these situations, special attention should be paid to VAT treatment, and a VAT specialist should be involved proactively and without hesitation through close internal cooperation within the audit firm.
VAT is a craft of its own
When auditors have access to VAT expertise during the audit process, and this expertise is applied through close internal cooperation, proper VAT treatment can be ensured. Potential issues can often be resolved swiftly and efficiently without requiring the audited entity to take any separate action or become involved in follow-up measures.
Sometimes, however, further examination of the VAT treatment of the entity being audited raises matters that call for broader and more in-depth analysis. Especially in such cases, it is in the best interests of the entity to address these matters without undue delay – solutions tend to be more readily available and economically viable at this stage. Preventing VAT-related risks from materializing or avoiding unnecessary costs is almost always more cost-effective than dealing with the issue once it has already attracted the attention of the tax authorities.
If VAT-related questions arising from an audit process give rise to uncertainty, do not hesitate to contact Tuokko’s experts to ensure that the matters are addressed in the most appropriate and effective way.
