Focusing on Tax Risks: Why the VAT Health Check is the First Step

What is a VAT Health Check?

A VAT Health Check is a structured review of selected VAT-relevant processes, postings and documentation. Its objective is to ensure that your internal procedures are fully aligned with applicable tax requirements and to identify potential risks before they result in audits or challenges by the tax authorities.

Why should you conduct a VAT Health Check?

1. Early identification of risks

VAT errors often arise unintentionally – due to unclear facts, incorrect system mappings or complex cross-border transactions. A Health Check uncovers such weaknesses before they lead to financial exposure.

2. Avoidance of back payments and penalty interest

Incorrect VAT treatment can result in substantial back payments during tax audits. A proactive review minimizes this risk and provides certainty.

3. Optimization of internal processes

By reviewing your process landscape – from invoicing to ERP system logic – inefficiencies are identified and practical improvements become possible.

4. Leveraging tax optimization potential

Many companies do not fully  utilize available input VAT deductions or simplification rules. A Health Check highlights where tax benefits can be realized.

5. Security for international transactions

Correct VAT treatment is particularly critical in cross-border supplies of goods and services. A VAT Health Check creates clarity and enhances compliance in an international environment.

How does a VAT Health Check work?

A VAT Health Check follows a structured and transparent approach aimed at identifying VAT risks, optimizing processes and ensuring compliance. The process typically consists of five phases:

1. Kick-off & scope definition

At the outset, the  objectives of your organization, the scope and the specific characteristics of the Health Check are jointly defined. It is essential that the scope and prioritization of topics are clearly agreed upon during the kick-off meeting. A full review is not always required; where budgets or capacities are limited, the review may focus on processes that are typically associated with higher VAT risk.

Our advisory experience shows that many organizations face resource constraints due to staffing shortages and therefore cannot accommodate large‑scale projects. In such cases, a targeted, risked-based Health Check represents an effective solution toreview the most critical processes. As the guiding principle applies here as well: it is better to set up a few processes correctly than none at all.

Typical questions include:

• Which business units and countries should be reviewed?
• Which systems, processes and transactions are in scope?
• Are there current challenges or internal questions to be addressed?

The result is a clear project plan defining timelines and required information.

2. Data and documentation collection

In this phase, relevant documents are collected, such as:

• Invoices (outgoing and incoming)
• Booking data / ERP exports
• Process descriptions and internal guidelines
• Contracts and documentation of business models
• Master data (customers, vendors or materials)

These documents form the basis for the subsequent analysis.

3. Analysis of processes and transactions

The next step involves a technical review. Depending on the agreed scope, this includes:

Process analysis

• How is VAT mapped in the ERP system?
• Where are manual interventions or special treatments applied?
• Do process flows and VAT treatment align?

Transaction analysis

• Review of sample bookings
• Assessment of cross-border supplies of goods and services
• Review of tax keys, tax codes and account assignments
• Analysis of typical risk areas (e.g. chain transactions, work supplies, place-of-supply rules)
• System review
• Reconciliation of system logic and tax determination
• Identification of misconfigurations or inconsistent settings

4. Assessment and identification of risks and potential

The analysis results are evaluated in a structured manner, identifying:

• Risks (incorrect tax treatment, missing documentation, system errors)
• Inefficient processes (manual workarounds, media discontinuities)
• Optimization potential (simplification rules, input VAT optimization)
• Quick wins (measures that can be implemented immediately)

Each finding is prioritized based on relevance and financial impact.

5. Results presentation and recommendations

At the conclusion of the Health Check, you receive a clear and practical overview, tailored to the agreed scope and your preferences, such as:

• Executive summary
• Risk report with concrete examples and impact assessments
• Recommendations for short- and long-term measures
• Prioritized implementation roadmap
• Workshops with specialist departments and IT

This provides your organization with a robust basis for decision-making – including clear and implementable next steps.

Outcome: Transparency, security and tax optimization.

A VAT Health Check not only enhances certainty vis-à-vis tax authorities, but also creates clear structures, optimized processes and often even financial benefits. It is an effective instrument for strengthening compliance and reducing company-wide tax risks.

Outlook: Ultimately, the VAT Health Check is the first step towards a VAT Tax Compliance Management System.

Combined Health Checks – why interface issues with other tax types should be included

In a dynamic regulatory environment, tax compliance is becoming increasingly complex. Companies are required not only to manage VAT effectively, but also to comply with numerous additional tax and statutory obligations. This is precisely where our interdisciplinary Tax Health Check comes into play: combining the classic VAT Health Check with reviews covering wage tax, customs and social security to provide a holistic view of your tax processes and risks.

Why a combined Health Check?

Tax types rarely operate in isolation. Supply chains (imports, exports) affect VAT and customs; incentive schemes (e.g. company events, gifts, company car use) impact both VAT and wage tax; employee assignments involve wage tax and social security; international services affect multiple tax types simultaneously. An integrated Health Check makes these interdependencies transparent and reduces risks comprehensively.

Our practical experience shows that recurring issues identified in audits should never be considered in isolation. For this reason, our experts have jointly addressed interface topics in numerous large‑scale projects and, based on this practical experience, have developed a combined Health Check specifically designed for these interfaces.

Your advantage: As many interface topics involve overlapping internal responsibilities, key stakeholders for multiple tax areas are involved only once in an efficient manner. This minimizes internal resources while maximizing the outcome, as several high-risk tax areas are reviewed simultaneously. Experience shows that an interface-based approach often leads to optimized internal processes and reduced risks through targeted recommendations.

How your combined Health Check is conducted

Following the approach of the VAT Health Check described above, we jointly define scope, focus areas and the tax types to be included. In addition to VAT, wage tax processes, customs topics or social security aspects may be incorporated as required, resulting in a tailored review approach for your company.

Relevant data and documentation are then collected, such as:

• VAT (ERP data, process descriptions, transaction overviews)
• Wage tax (travel expenses, compensation models, contracts, secondments)
• Customs (tariff codes, proofs of preference, import/export documents)
• Social security (contracts, status determinations, secondment documentation)

This combination enables a comprehensive assessment of risks and interfaces.

We review, for example:

• Tax mapping in ERP systems
• Typical risk areas such as cross-border transactions
• System configurations and tax determination
• Wage tax treatment of compensation components
• Customs processes such as export evidence in combination with VAT-exempt exports, as well as import processes (import VAT debtor and input VAT deduction)
• Social security classifications and reporting obligations

This not only highlights isolated risks, but also areas where multiple tax types are affected – such as employee secondments, supply chains or hybrid compensation models.

Assessment and prioritization

We identify:

• Risk positions per tax type
• Financial impacts and compliance relevance
• Cross-cutting interface issues
• Quick wins that enable immediate improvement

This provides full transparency regarding your current tax position.

Final report and action plan

Upon request, you will receive a clear and easy-to-understand evaluation, including:

• Executive summary for management
• Detailed risk reports per tax type
• Prioritized recommendations for action
• Roadmap for sustainable optimization of your tax and compliance processes
• Workshops with tax, finance, HR or logistics teams

Your benefits at a glance

• Increased certainty across relevant tax types
• Identification of interface risks often overlooked in single-tax reviews
• Optimization potential across VAT, customs, wage tax and social security
• Cost savings through improved system and process design
• High level of robustness in tax audits

Outlook on upcoming Health Checks

In Part 2, we present the details of a Wage Tax Health Check, particularly interface issues in a combined wage tax/VAT Health Check.

In Part 3, we introduce our Customs Health Check, including analysis options via customs authorities using Power BI and further insights into a combined customs/VAT Health Check.

In Part 4, we explain how a Social Security Health Check works, with explicit reference to a combined Health Check covering social security, wage tax and VAT.