Why VAT Number Verification is Crucial in Business Transactions

States conduct business verification through multiple methods because each jurisdiction implements its own system for entity identity and authorization procedures.

The identification process inside the European Union requires evaluation of the Value Added Tax (VAT) number as a crucial element.

VAT numbers also attract suspicious activities because of their widespread usage in the business world. A recent European Commission report, “VAT Gap in the EU – report 2024,” estimated €89 billion worth of total VAT noncompliance across the European Union marketplace for 2022 at 7.0% of the VAT Total Tax Liability (VTTL). 

The report highlights the substantial VAT-related discrepancies that businesses and tax authorities must combat. Business integrity requires accurate VAT number verification to prevent suspicious actions.

VAT Number Meaning | The Identification Code 

VAT Numbers serve as distinct markers assigned to companies interested in VAT taxation. Companies use this identification number to collect VAT taxes on their taxable transactions and subsequently perform tax remittance. The system acts as a key mechanism to fulfill the requirements of EU regulations. 

“VAT stands for Value Added Tax. A business must pay this tax type when purchasing goods or services.”

Businesses require VAT numbers for legitimate operations. However, this system has disadvantages when used to perform illegal actions. Firms manipulate their VAT systems to evade tax duties through a fraudulent scheme called carousel fraud or missing trader fraud. 

Such fraudulent practices damage both tax systems’ operations and cause substantial financial damage.

Case Study – VAT Fraud in the Digital Art Market3

Even digital assets like NFTs are not immune to VAT fraud. NFTs(non-fungible tokens) signify one prominent demonstration of VAT fraud in the digital art marketplace. Three digital assets worth £1.4 million passed to HM Revenue and Customs’ ownership in February 2022 during an investigation of VAT tax fraud in the UK. 

This marked the initial VAT-related domestic enforcement operation performed by this legal authority. Moreover, the incident underlines the involvement of VAT fraud, where digital assets are exploited to evade tax obligations.

Business Identifiers in Different Parts of the World 

Like the EU’s VAT number, every state uses different business identifiers for similar purposes. Some of the famous examples include the following:

Importance of VAT Number Verification 

VAT registration numbers are essential tools for verifying tax compliance in legitimate business operations throughout the EU. A business receives its distinct VAT number when it meets registration standards for financial reporting, leading to tax authority monitoring of taxable financial transactions. 

How It Helps In Preventing Fraud

Combating VAT fraud and ensuring businesses adhere to the tax obligations can be done by cross-checking VAT identification numbers. The verification can be done from the official databases such as the EU’s VIES (VAT Information Exchange System) and other third-party sources.

Proper verification prevents fraudulent businesses from taking advantage of VAT systems. It identifies companies that might be using falsified or invalid numbers to conduct illicit activities.

Moreover, it reduces the chance of fraudulent companies slipping through the cracks significantly, leading to both financial losses for legitimate businesses and tax authorities. 

How Effective Verification Practices Can Reduce VAT Fraud

Two companies are interested in strategic collaboration; however, before entering into the agreement, one wants to verify the other company to avoid any future compliance issues or financial irregularities.

Below is the detailed, step-by-step VAT validation process for businesses:

Partnership Proposal 

Company Alpha and Company Beta are two tech firms aiming to develop an innovative software platform. However, before signing the agreement, company Beta initiated a comprehensive KYB check to ensure the potential partner adheres to regulatory requirements. One of the key aspects is validating that the potential entity is not involved in practices like VAT fraud.

Important Document Submission

Company Alpha was requested to provide the following information:

1. Business registration certificate.
2. VAT registration and associated VAT number 
3. Financial statements 
4. Details on company ownership and key management

The set of documents will serve to verify the identity, regulatory status, and       financial integrity of Company Alpha. 

VAT Number Verification as Part of KYB 

Company Beta verified the VAT number using the KYB checks provided by Company Alpha. The checks include confirmation and cross-referencing to avoid any discrepancies that may trigger further investigation for VAT fraud.

Cross Referencing 

The comprehensive cross-referencing from official registries provides the complete picture of Company Alpha’s standing while ensuring that the VAT number and filings do not indicate fraudulent behaviors.

Risk Assessment and Decision Making

Based on the KYB verification process, Company Beta assesses the authenticity of documents submitted. The integrity of Company Alpha has been remitting VAT accurately. Therefore, after the KYB process, Company Beta categorizes Company Alpha as either low-risk or high-risk. 

The robust KYB solution assisted businesses in making informed decisions at the right time by flagging issues and verifying the information provided.

Why does the Company Require VAT Number Lookup?

A company is required to conduct a VAT number lookup for several critical reasons that are primarily related to compliance, risk mitigation, and operational efficiency. Have a look at some essentials for businesses to perform a VAT lookup in this section.

How The KYB Helps with VAT Number Identification Solution

Don’t let VAT fraud put your business at risk. The verification of the business VAT numbers is vital. However, the process of verifying using manual means can be time-consuming and lengthy. The KYB solutions will help your business ensure compliance and validate the entity’s VAT number to strengthen trust with the partners.

The KYB’s solution makes it easy to confirm your partner’s tax status and reduce costly mistakes while providing data from official registries of VIES (VAT Information Exchange system). It’s more than a compliance step, it’s a commitment to transparency and trust. Contact us today to learn more about how The KYB can support your VAT verification needs and help you secure your business.

Frequently Asked Questions

What is a VAT number in the USA?

In the USA, there is no VAT number because the country does not use a value-added tax system. Instead, businesses usually have an EIN (Employer Identification Number) for tax purposes.

 Is a VAT number the Same as an EIN number?

No, a VAT number is used for tax purposes in the EU for businesses dealing with goods and services, while an EIN (Employer Identification Number) is used in the U.S. for identifying businesses for tax and legal purposes. They are different numbers for different tax systems.

 What is the Process for VAT number Check?

The process for a VAT number check involves verifying the validity of a VAT number issued to a business through an official database like the EU’s VIES (VAT Information Exchange System). This ensures that the VAT number is active, correctly registered, and linked to the correct business entity.

 How to Get a VAT number?

To get a VAT number, you need to register with the tax authorities in your country. The entity can usually apply online through their official website or visit their office for assistance.