Reliable Audit Trail (PAF)

Reliable audit trail (PAF): with our tax lawyers, become flawless

In the event of a tax audit, each company must be in a position to present a reliable audit trail. This documentation, presenting the internal control procedures relating to the purchase and sale of products and services, must be indisputable. Our tax lawyers, specialists in VAT, are valuable allies in verifying the compliance of the Reliable Audit Trail and allowing you to avoid sanctions, penalties and the rejection of invoices and the right to deduct VAT.

What is the Reliable Audit Trail or PAF?

In 2013, businesses have the possibility of issuing invoices in any type of format: paper or electronic. To compensate, the tax administration must be able to analyze, during a tax audit, the trace between any invoice issued (or received) and the delivery of goods or the provision of services. In particular to verify compliance with VAT regulations.

Named PAF or Reliable Audit Trail, this set of documents and information must trace comprehensively and meticulously the financial transactions related to the purchase and sale for a company or various other organizations (see below).

The Reliable Audit Trail is an approach consisting in the establishment of a continuous and integrated process, with the description, in a clear and exhaustive way, of the path of operations (information flows, financial flows), their documentation (accounting documents and supporting documents) and their control.

Not only must precise monitoring therefore be carried out through internal, documented and permanent controls, but the (legible) data and documents must be kept for at least 6 years.

To note

Transactions that are the subject of invoices issued using advanced electronic signatures (RGS), a server stamp in accordance with legislation or an EDI (Electronic Data Exchange) solution are not affected by the Reliable Audit Trail.

Mail, fax, emails, exchanges in a cloud (PDF), etc., must be fully integrated into the PAF.

At a practical level

At present, a reliable Audit Trail increasingly takes the form of documentation or a documentary corpus that lists, one after the other, the checks that are carried out by each employee of the Company, both at the time of purchase and sale.

At the level of controls

The PAF must be available and up to date at all times. For the most part, it is requested during the first VAT audit meeting to detect possible fraud on its deductibility.

Who is affected by the Reliable Audit Trail?

The requirement to document a reliable audit trail is not just for large organizations, far from it.

The PAF is essential for any company carrying out transactions subject to VAT.

Commercial businesses

All companies that offer goods and/or services or buy them, multinationals, SMEs or small-scale SMEs, are required to have a reliable audit trail to ensure the reliability of their billing flow and compliance with their fiscal obligations.

Individual businesses

Sole proprietorships, such as self-employed individuals, artisans, artisans, traders and liberal professions, must also comply with legal obligations in terms of a reliable audit trail for their accounting and VAT return.

Non-profit associations and organizations

Contrary to what one might think, associations that carry out commercial or lucrative activities are also subject to accounting obligations, and must therefore set up a reliable audit trail for these activities.

Financial organizations

Banks, insurance companies, asset management companies and other financial organizations are also concerned and are obliged to provide for controls and documentation tracking their transactions even if they are exempt from VAT in respect of their sales transactions.

Public Administrations

Some public administrations and local authorities may be subject to accounting and VAT obligations for some of their lucrative or commercial activities; they too must comply with the requirements for a reliable audit trail.

Legal obligations in connection with reliable audit trail documentation

This PAF documentation must be infallible at all levels, it is supposed to cover the entire purchasing process, not just VAT invoices.

The potential controller must be able to:

• monitor and chronologically reconstruct the entire billing process,

• ensure that the invoice issued or received corresponds to the completion of the planned final exchange of goods or services,

• have access to all other documents and supporting documents. In addition to invoices, the company is obliged to keep quotes, order and delivery forms, etc.

Businesses must therefore:

• above all, comply with legal and regulatory obligations when issuing invoices (mandatory information, VAT number including intra-community VAT, name of the issuer, SIRET number, etc.),

• carefully keep ALL documents related to each billing in full (annexes, etc.) and legible, in chronological order: quotes, purchase orders, validation, receipt of the deposit, production, delivery notes, delivery notes, returns of goods, invoicing, payment, etc.

• carry out internal checks and controls as best you can to avoid duplicates or losses, verify compliance with legislation and regulations in force, ensure that there are no errors (rates, discounts, good VAT rate, etc.)

The installation of control over internal accounting processes is therefore essential and can work in your favor during a tax audit.

Penalties for the absence of a reliable audit trail

The number of tax audits, in particular on the management of the collection and deduction of VAT, is increasing year by year. VAT is one of the most important revenues for the French State.

However, all it takes is a simple error during an audit for the Tax Administration to impose sanctions that will damage the cash flow and the very functioning of the company or organization at fault.

Problems with statements on invoices

The company will have to pay a tax fine of €15, not on the invoice (s) in question but for each error, omission or inaccuracy. However, the final adjustment amount cannot exceed 25% of the invoice amount.

Problems with invoices received (purchases)

The penalty is heavy: the Tax Administration will question the possibility of deducing the corresponding VAT for the company.

For invoices issued (sales)

If during the tax audit, the auditor detects exchanges of goods or services that were not invoiced, the organization must pay a fine of 50% of the transaction amount, with a ceiling of €375,000 per fiscal year. If the invoice is issued, the fine rate is reduced to 5% (capped at 37,500 per fiscal year).

The same exemptions are provided as in the case of invoices issued that do not comply with the mandatory information.

Lack of original documents

Copies of sales or purchase invoices are not admissible in the documentation of a Reliable Audit Trail. In case of an original not available, the risks indicated above apply.

Beyond compliance: PAF as a growth driver

The Reliable Audit Trail is often seen as a thankless task. Many companies ignore its documentation, due to a lack of resources, time, knowledge of regulations, tools that are easy to use, etc.

With the help of our tax law firm specializing in VAT, you will see that the installation of an effective Reliable Audit Trail is more than a regulatory requirement.

Legal compliance and optimized management of internal processes

First of all, of course, legal and fiscal compliance saves you from any worries or fines during a tax audit. Likewise, during an audit, the presentation of a rigorous PAF facilitates exchanges with the Tax Administration. And prove your professionalism.

In addition, the analysis of all internal parameters, routing processes and documents by our experts in the majority of cases reveals possible adjustments. And provides a plan for improving internal processes.

Creating faster, automated, secure and more efficient procedures is the core of our business: our tax law firm was built around the development of IT tools and systems aimed at facilitating all aspects of VAT management.

We will be able to offer you secure solutions for automating invoicing, controls, archiving, etc. that are not only effective but customizable and above all easy to handle.

In the long run, not only will you have peace of mind if an inspection is triggered, but you will also save time and money on managing invoices and VAT.

Risk Management and Optimization

Our audits also often identify “risk areas”: weak, insecure procedures, non-existent or not optimized controls, non-conformities... In short, so many risks for your business, not only during an audit but also for turnover.

As you will have understood, our intervention is not limited to a simple verification of PAF procedures. By analysing compliance with obligations, we will identify opportunities, especially in terms of VAT: recovery of duties, special regimes, etc.

A personalized PAF audit

Our firm is niche: we preferred to focus on VAT than to offer a more general offer. And there are several reasons for this:

• Ensure hyper-personalized follow-up and tailor-made solutions: we do not follow ready-made procedures, we adapt to your needs, your uniqueness, your objectives, etc. Likewise, our invoicing does not follow a pre-established scale as in some general law firms. Our commercial proposal will be transparent, at a fixed price and in relation to our intervention.

• Offer real expertise around VAT issues and regulations: not only are our experiences, especially in terms of setting up the Reliable Audit Trail, are numerous and varied but we maintain a constant legislative watch to ensure you a top-of-the-range service.

• Be available to our clients throughout the process: you will only be in direct contact with your lawyer dedicated to the documentation of the Reliable Audit Trail.