Tax audit in online retail: "VAT is a risk tax where mistakes happen!"

The spectre for all entrepreneurs: the tax audit. If tax auditors want to check the exact accounting figures and upstream systems such as documents in detail, many entrepreneurs start to sweat. It is therefore important to know what a tax audit is and what entrepreneurs need to be aware of. To make the whole thing a little less nerve-wracking for you, we have teamed up with tax auditors (certified tax consultants) Daniel Denker (in a non-official capacity). He is a tax expert, trains other tax consultants and told us which pitfalls should be avoided at all costs and how you can organize your accounting properly.

The reasons for a tax audit

The reasons for an extensive audit can be very different. It does not mean per se that something has gone wrong and does not necessarily constitute misconduct. Rather, it is a measure to ensure that the tax information is correct and corresponds to the actual course of business.

It can be pure coincidence that a company is selected. But anomalies can also play a role. "Conspicuous features mean that there has been extremely high growth within a short period of time, for example - we see this very often in online retail. As a result, e-commerce companies can sometimes come under scrutiny," explains Daniel Denker. In addition to his work as a tax auditor, he also shares his expertise as a guest lecturer at the Lower Saxony Tax Academy, where he trains prospective tax officers. He has also been involved for many years as a speaker in training for tax consultants and their employees and regularly publishes articles for various specialist journals.

"Another cause may be control notifications, especially with the future focus on the current Platform Tax Transparency Act", Denker continues. Turnover from platforms such as Amazon and eBay is automatically reported to the tax office. "If these reported sales do not match the figures in the accounts or there are discrepancies, the tax office wants to check this more closely. This can be due to factors such as returns or cancellations."

Minimize potential tax risks: Process documentation and correct recording

All companies - regardless of whether they are large corporations, SMEs, sole proprietorships or freelancers without employees - are obliged to keep tax-relevant business documents such as balance sheets, receipts and invoices for ten years. Especially in e-commerce, where a large number of transactions are processed on a daily basis, clear documentation of tax-relevant processes is essential. A crucial step in minimizing the risk of a tax audit is to create a comprehensive Process documentation to be drawn up. "This is required by the tax authorities. It should enable an expert third party to quickly familiarize themselves with the accounting and the situation of the company," explains Denker. This can be particularly challenging for complex online retailers that operate on different platforms. It is therefore important that not only entrepreneurs themselves, but also other people can get an overview, Denker emphasizes.

Correct record-keeping also includes all information on income, expenditure, stocks and other financial transactions. In principle, receipts should not only be kept for the tax audit, but generally for the taxation procedure. "This includes all incoming and outgoing invoices in particular. If I sell something and issue an invoice, I have to keep it. The same applies if I buy something," emphasizes Denker. Account statements are also important, especially if different banks are used, including online banks and foreign banks. "There are also special requirements for retailers who sell to other EU countries, such as the recipient's VAT identification number." Complete documentation not only facilitates internal control, but also cooperation with the tax authorities in the event of an audit.

"The sales tax is a risk tax where mistakes can happen!"

VAT in particular poses a tax challenge in online retail, explains the auditor. "VAT is a risk tax where errors can easily occur." According to Denker, a common mistake in intra-Community trade is that no VAT identification number is requested from another entrepreneur and therefore invoicing is done on a net basis. "However, this makes the turnover taxable and 19% VAT has to be charged on it, which significantly affects the margin or can be a worst-case scenario," he explains. "Such errors often don't just occur once, but can be repeated, as the mistakes are often made in many transactions," Denker continues. "For example, in transactions where the VAT number has never been checked, or whether the customer is a company or a private individual, this can be expensive!"

Another important aspect relates to sales to private individuals, where the correct place for VAT must be determined. This means that it must be determined where the VAT arises, whether it is German, Spanish or Austrian VAT.

These special features make VAT in online trading a complex and challenging type of tax that requires precise knowledge of the relevant regulations and careful accounting in order to minimize tax risks.

Digital tools provide insights in real time

Fortunately, modern digital tools and software solutions offer efficient ways to manage tax documentation in e-commerce. There are a variety of tools that help companies to document their transactions transparently and properly and offer ready-made model procedure documentation. Of course, every company situation is individual, Denker emphasizes, but these sample procedure documentations are a good starting point as they are often similar. "You can then adapt them to the specific needs of your company. This is usually possible for small to medium-sized online retailers. However, if the company is very large and complex, with many employees, different locations and its own warehouses, including abroad, then it is appropriate to create individual procedural documentation that is tailored to the specific circumstances."

Tax compliance: How to reduce the risk of a tax audit

"Submitting the advance VAT return on time, meeting my payment obligations and submitting my recapitulative statement in case the tax office has any queries are of paramount importance," Denker confirms. "These are essentially the compliance factors." Of course, the likelihood of a tax audit cannot be completely avoided, even if everything is done correctly.

"However, if risk management detects rapid growth, the tax authorities may issue a report for a tax audit. In online retail, it is also not uncommon for input tax overpayments to occur, which means that you get more back from the tax office than you have paid in VAT. In such cases, the tax office could carry out a special VAT audit, but this does not necessarily indicate misconduct," emphasizes Denker. It is then important to have all relevant documents ready, such as bank statements, incoming and outgoing receipts and procedural documentation.

What is advisable now?

It is advisable to proactively approach auditors and ask whether further information is required in order to be transparent. "This really requires careful storage of all documents. This is really the most important thing, as incomplete documentation could make you vulnerable. It may seem like a lot, but it really is a top priority. If a tax audit is then carried out, at least you have all the documents to hand, which may only result in minor legal issues that you may be able to reach an agreement on," explains Denker.

It is important to avoid a sensitive estimate by the tax audit. In a tax audit, not only VAT issues are examined, but other tax matters such as deductible expenses can also be checked to determine whether they can be recognized for tax purposes. According to the tax expert, this also happens. However, a tax audit can also be concluded without any objections.

A tax audit in online retail can therefore be a drastic event, but does not necessarily mean any misconduct on the part of the company. Rather, it serves to check the tax information and ensure that it corresponds to the actual course of business. In order to minimize potential tax risks, careful and transparent documentation of all business processes and precise knowledge of the relevant tax regulations are essential. Ultimately, good preparation and proactive communication with the tax authorities can help to successfully conclude a tax audit and clarify potential tax issues.