VAT rates: how to deal with errors

In some activities, businesses are subject to several VAT rates. SMEs in construction, merchandise sales or catering are a good example. The administration of the various rates is delicate, and can lead to errors on invoices, and therefore financial and legal complications. Not to mention the negative impact on customer trust in the business.

Let's take a closer look at where they can come from, how to identify them and especially how to regularize them with the tax authorities, as well as the best practices to prevent them in the future.

VAT errors on invoices: what are they?

When billing the customer, no one is immune to mistakes and misunderstandings about rates, unless your company uses powerful and well-calibrated software... and again. Indeed, a bad rate of value-added tax can occur, even when the craftsman, the company manager or the accounting department does their job well.

Excess VAT collected... or less

This is an example of common mistakes, especially as said above when the company has to “juggle” several VAT rates.

In the case of buildings, depending on the site or even the different lots, VAT varies from the standard rate of 20% for structural refurbishment work, to the reduced rate of 10% or even 5.5% for energy renovation work on a home.

These are all possible errors resulting in either an excessive payment of VAT that affects the company's cash flow, or a shortfall that can lead to sanctions or penalties by the tax authorities. As well as a potentially expensive regularization.

Invoicing VAT on a non-taxable transaction

In the activity of some companies, there are non-taxable transactions or services or transactions benefiting from special regimes and exemptions. These misunderstandings are due to a poor understanding of tax categories. Products or services that are supposed to be exempt from VAT are invoiced with, or vice versa.

The right VAT rate... but on the wrong amount

Finally, and this is an increasingly less common mistake thanks to the automation of invoicing, all you have to do is make a mistake in the various services, sale of goods or services to customers, to end up with incorrect VAT.

The right VAT rate... but on the wrong amount

Finally, and this is an increasingly less common mistake thanks to the automation of invoicing, all you have to do is make a mistake in the various services, sale of goods or services to customers, to end up with incorrect VAT.

The source of VAT rate errors

These concerns come from various problems, and knowing them is essential to avoid them.

Human errors are among the most common, resulting from incorrectly entering VAT rates when invoicing or accounting. These errors often result from inadequate staff training, the complexity of certain accounting software and/or tax rules. A craftsman or a small business, busy with their daily work, often have trouble being 100% effective in accounting.

Classification problems occur when products or services are misclassified, often due to an inadequate understanding of the relevant tax categories.

Possible legislative changes are also an example of accounting failure. Likewise, the creation of new goods or services, the deployment of business outside France, the purchase of another company, etc.: the very changes in the company often lead to fiscal changes or new tax regulations.

Issues also arise when accounting or sales management software is not properly used and updated to reflect current VAT rates, resulting in incorrect rates being applied. Using a software solution that is poorly configured beforehand multiplies the cases of possible misunderstandings about the VAT rate applied, especially when sales volumes or the number of customers are high.

Communication errors between internal departments, such as between sales and accounting teams, can lead to differences in rates.

Finally, documentation and tracking weaknesses occur when transaction records are not properly maintained, making it difficult to verify the accuracy of the VAT rates applied.

These various examples of misunderstandings highlight the importance of early work on the subject, continuing education, clear communication and robust management systems to minimize the risk of mistakes and declare the appropriate VAT rate.

Process for correcting VAT rate errors

Correcting inaccuracies in VAT rates is critical to ensuring business tax compliance and avoiding penalties. The correction process can be complex, but it is crucial to follow it rigorously to minimize financial and legal impacts.

Identifying problems

The first step is to accurately identify VAT rate errors. There are several methods:

• Regular verification of VAT returns: Businesses or artisans must carefully review their VAT returns to ensure that the rates applied are correct. And compare the rates charged with the applicable legal rates.
• Internal audits: carrying out periodic internal audits allows errors to be detected before they become problems. These audits must be conducted by teams trained specifically in VAT rules.
• External audits: using external consultants provides an impartial and expert perspective, ensuring thorough verification of VAT practices.
• Use of specialized software: Advanced computer tools can automate the verification of VAT rates and identify anomalies quickly and accurately.

Rectification of VAT returns

Once the errors have been identified, the next step is to correct the VAT returns:

• Amendment of declarations: businesses must submit corrective declarations to correct erroneous VAT rates, either by modifying the declarations already submitted or by submitting new declarations for the periods in question.
• Communication with the tax administration: it is essential to notify the tax administration of the mistakes identified and the corrections made. This communication should be transparent and documented to avoid ambiguity and show the good faith of the company.
• Complete documentation: businesses must maintain detailed documentation of the problems identified, corrections made and communications with the tax authorities: copies of corrective declarations, correspondence with customers, proof of payment or reimbursement, etc. (all information that may be requested for further transactions).

Recovery of overpaid amounts

For errors where VAT amounts were paid in excess, businesses can start a procedure to recover the difference:

• Refund request: a refund request must be submitted to the tax authorities, along with supporting documentation. This request must detail the errors made, the amounts involved, and the corrections made.
• VAT credit: if charging is not possible on the return filed during the month, businesses can benefit from a VAT credit. The difference may be charged to future VAT returns. This credit makes it possible to offset overpaid amounts with amounts due later.
• Administrative follow-up: the reimbursement process can take time and requires rigorous administrative follow-up. Businesses should be prepared to provide additional information if required by the tax authority.
• Consultation with tax lawyers: using tax lawyers specialized in VAT facilitates the process of requesting a refund. Their job is to advise on best practices and ensure that all steps comply with legal requirements. Lawyers also have the option of filing a complaint with the State in order to obtain overpaid amounts.

Regularization of underpaid amounts

When VAT amounts have been underpaid, it is crucial to adjust them quickly to avoid penalties:

• Payment of missing amounts: Businesses must calculate underpaid VAT amounts and pay them within the deadlines set by the tax authority.
• Penalty Management: Penalties may apply for underpaid amounts. It is important to understand these penalties and, if possible, to negotiate with the tax authority to reduce them. Tax lawyers are particularly useful in these negotiations.
• Future prevention: after regularization, businesses must put in place measures to prevent these concerns about the applicable VAT rate from recurring: staff training and information, audits, etc.

Updating accounting systems

To prevent future errors in the applicable VAT rate, it is essential to keep accounting systems up to date:

• Accounting software review: ensure that accounting software is configured correctly to apply the correct VAT to the correct invoices, especially if there are reduced or different rates of course, and that updates are made regularly. But also that they are calibrated to avoid mistakes in advance: quotes, invoices, errors in the prices of goods and services, services, etc.
• Continuing education: training staff on changes in VAT rules and best accounting practices.
• Internal procedures: create strict procedures within all relevant departments of the company for the verification of the VAT rates applied and for the management of tax returns.

Managing the relationship with customers in the event of a VAT rate error

Beyond tax compliance, as VAT errors occur on invoices, it is crucial to communicate with the customer. Not only to maintain customer trust and satisfaction but also to find a solution, if possible, before regularization.

Proactive communication

The first step, of course, is to inform the customers concerned as soon as the error is detected. Fast and clear communication is essential to avoid any misunderstandings or frustrations. Here are a few steps to follow:

• Notification: send an email or letter to customers explaining the VAT rate error, the reasons for it, and the steps you are taking to correct it. You can also telephone the customer, but it is imperative that you have written records to be provided on request for taxes if necessary.
• Apologies and assurances: offer a sincere apology for the inconvenience caused and assure customers that measures are in place to prevent the error from happening again.
• Attached documentation: provide copies of corrected invoices with appropriate VAT rates.

Correction of invoices and/or the VAT rate

Correcting erroneous invoices is a necessary step in restoring a customer's financial position. Corrections take several forms:

• Issuance of corrective invoices: send corrected invoices with the correct VAT rates and adjusted amounts.
• New billing: for VAT underbilling errors, issue a new invoice to cover the difference due.

Namely: The Court of Cassation, ruling of July 6, 2023, stipulates that a craftsman cannot claim a supplement from his client in the event of problems with the VAT rate applicable to his work. The craftsman was wrong and applied a reduced rate of 5.5% to his client instead of 20%. The Court of Cassation overturned the judgment of the Court of Appeal: “a professional cannot claim additional VAT if he invoices at an erroneous rate, unless the parties have agreed to such a correction or if the customer has incorrectly completed the tax certificate issued by the craftsman”.

Hence the importance for a craft company to “lock in” the management of value added tax at an early stage.

Customer follow-up and support

Ensuring appropriate follow-up and offering dedicated customer support helps to establish trust:

• Dedicated hotline: create a specific hotline or email address if possible to deal with customer questions and concerns about the VAT error. SMEs integrate it into the after-sales service; small craft businesses obviously do not have the resources.
• Fast answers: ensure that all customer questions are answered quickly and professionally.
• Customer feedback: soliciting customer feedback on how the error was handled to improve future processes.

Building trust

To regain and strengthen customer trust, it is essential to demonstrate that the company has taken concrete steps to avoid future mistakes:

• Transparency: sharing the actions created and the work beforehand to correct errors and prevent their recurrence, such as training staff and updating accounting systems.
• Quality commitment: reaffirm the company's commitment to service quality and customer satisfaction.

Get help from a tax lawyer specialized in VAT

Managing VAT rate errors can be complex and time-consuming for businesses. Calling on a tax lawyer specialized in Value Added Tax greatly facilitates this work and guarantees optimal tax compliance.

Note: seeking help from such experts is not just for big businesses. We often work with SMEs and artisans who cannot benefit from so many resources. They are the most vulnerable in accounting management, which requires significant, even discouraging, daily work.

Make way for experts

Tax lawyers specializing in VAT have in-depth expertise in tax regulations and applicable rates. Their job is to provide accurate advice tailored to the specific needs of each client. In cases of VAT rate errors, they analyze invoices and declarations to quickly identify erroneous rates and the necessary corrections. They are also in a position to apply the correction procedures in a compliant and effective manner, thus reducing the risk of penalties, especially when applying reduced rates incorrectly.

Assistance in administrative procedures

One of the main advantages of working with a tax lawyer is their ability to manage complex administrative procedures. He can request refunds of overpaid VAT by submitting appropriate requests to the tax authority. In addition, our experts are used to communicating directly with tax authorities to clarify error cases and ensure that corrections and other transactions are properly recorded.

Customer relationship management

In case of problems with the VAT rate on invoices, the relationship with customers may be affected.

A tax lawyer helps to deal with this situation in a professional manner by writing client notifications explaining errors and corrective actions taken. They also assist in the issuance of corrective invoices and in the establishment of the necessary credits or refunds. Additionally, they can provide a support line to respond to customer questions and concerns, increasing their trust and satisfaction.

VAT: prevention is better than cure

This is a bit our leitmotif in everything related to value added tax: we have to work at the front end to avoid problems.

Our firm often works with companies, even modest ones, to install preventive measures in order to avoid future mistakes.

From the craftsman who has trouble with numbers to the international company facing complex VAT situations, we are in a position to provide a high quality and personalized service.

Note: in addition to being one of the only tax law firms specialized only on VAT, we train in VAT and above all develop customizable computer tools. Our online solution is efficient, secure, constantly updated, and above all easy to use, thus relieving the work of the people who deal with invoices and VAT, while automating most of the steps up to tax reporting.

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In summary, the work of a tax lawyer is a valuable investment in compliance and peace of mind for companies that, freed from the “sword of Damocles” of possible errors in terms of VAT rates, can focus on their business, their work.

Contact one of our value-added tax experts quickly, by phone or online, he will be able to give you the benefit of his professional analysis in a few minutes to optimize your future operations on a case-by-case basis. In the meantime, you can take a look at our “customer” page for success stories ranging from large international companies to craft companies.

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