Mistake No. 1: Incorrect application of VAT rates
There are four VAT rates in Luxembourg (3%, 8%, 14% and 17%), applied depending on the nature of the goods or services. A frequent mistake made by SMEs is failing to apply the correct rate on their invoices.
Use case: a company mistakenly applies the super-reduced rate of 3% to a service that should have been subject to the standard rate of 17%. As a result, it collects only 3% VAT instead of the required 17%. During a tax audit, the Luxembourg Registration Duties, Estates and VAT Authority (AED) will require payment of the missing VAT, together with financial penalties and late-payment interest to rectify the error. Conversely, applying a rate that is too high is also detrimental to the business and its customers: the company invoices an excessive gross amount, and the taxable customer may be unable to recover the overcharged VAT, as the tax authorities may refuse to refund the difference.
How to avoid it: secure your invoicing by systematically checking the applicable VAT rate before issuing an invoice. Stay informed about the lists of goods and services eligible for reduced or super-reduced rates currently in force. In case of doubt, consult an accountant or the AED’s official guidance. This vigilance will help you avoid VAT reassessments due to incorrect rates and preserve your customers’ trust.
Mistake No. 2: Failure to declare intra-Community transactions
The supply of goods and services within the European Union is subject to specific rules (intra-Community VAT numbers, reverse charge mechanism, EC Sales Lists/Intrastat). An SME may, for example, forget to declare an intra-Community purchase made VAT-free from a German supplier, mistakenly assuming that the transaction is simply “out of scope of VAT”. However, this omission constitutes an error in the Luxembourg VAT return.
Use case: a Luxembourg start-up imports goods worth €10,000 from Germany (invoiced VAT-free thanks to its intra-Community VAT number). If it fails to declare this intra-Community acquisition in its periodic VAT return, the error will sooner or later be detected through intra-EU tax information exchanges. The company will then face a VAT adjustment (17% of €10,000, i.e. €1,700), together with late-payment interest and possible fines for incomplete reporting. Any mistake in managing intra-Community VAT can therefore result in tax reassessments, penalties and significant administrative complications.
How to avoid it: ensure full compliance with intra-EU transaction obligations. For each intra-Community purchase, self-account for the corresponding Luxembourg VAT (reverse charge mechanism) in your VAT return for the relevant month or quarter, and deduct it simultaneously if you are entitled to do so. For each intra-Community supply (sale to a taxable customer in another Member State), also file an EC Sales List in addition to your periodic VAT return. Check the validity of your European partners’ VAT numbers and retain the required transport or transaction evidence. If in doubt about the VAT treatment of an international transaction, seek advice from a tax specialist. This administrative rigor will protect you from penalties and secure your European operations.
Mistake No. 3: Late filing of VAT returns
Late VAT filings are a common error, often caused by poor internal organization or lack of time. However, statutory deadlines in Luxembourg are strict (generally the 15th of the month following the relevant period), and any delay triggers penalties from the first day of non-compliance.
Use case: an SME manager, overwhelmed by daily operations, submits a quarterly VAT return two weeks late. The AED automatically applies a late-filing penalty – for example, 0.6% of the VAT due per commenced month of delay. These penalties continue to accrue until the return is regularised, unnecessarily burdening the company’s cash flow. Moreover, repeated delays or poorly prepared returns may trigger a more in-depth tax audit, during which additional irregularities may be uncovered.
How to avoid it: anticipate your filing obligations. Set up reminders ahead of each deadline and avoid postponing the preparation of your VAT returns. A best practice is to keep your accounting up to date and to centralise all sales and purchase documents on an ongoing basis, for example via accounting software or a shared online platform with your accountant. This prevents last-minute invoice sorting. Suitable management tools help ensure compliance with legal deadlines without stress. If you know a deadline cannot be met, it is preferable to request an extension from the tax authorities or mandate a trusted third party, rather than filing late. Timely filing not only saves you from financial penalties but also preserves your company’s credibility with the authorities.
Mistake No. 4: Forgetting purchase invoices and losing the right to deduct VAT
Another frequent error concerns the right to deduct input VAT on business purchases. To recover VAT paid upstream, the corresponding purchase invoices must be properly declared.
Use case: a sole trader fails to provide certain overhead expense invoices to their accountant when finalising the VAT return. These expenses (for example, €500 excl. VAT for office supplies with €85 VAT) are not included in the return, meaning that the VAT paid is not recovered by the business. By omitting these invoices, the entrepreneur loses the right to deduct the corresponding VAT – a definite financial loss. Furthermore, in the event of an audit, an unavailable invoice or an incorrectly issued one (in the individual’s name instead of the company’s, or missing the supplier’s VAT number) will not be accepted by the AED, and the deduction will be rejected. This type of administrative error, often linked to disorganised document management, may delay VAT filings and expose the company to reassessments during an audit.
How to avoid it: adopt a rigorous system for managing invoices and supporting documents. As soon as a business expense is incurred, ensure that the invoice is issued in the company’s name and includes all mandatory legal information (including the supplier’s VAT number). Record it promptly in your accounting system or in a shared folder with your accountant. Ideally, invoices should be centralised on an ongoing basis rather than accumulated in a drawer. This way, none will be forgotten at the time of filing. If an omission is discovered after the fact, it may sometimes be possible to regularise it in a subsequent period, but prevention is always preferable. Good document management ensures complete and reliable VAT returns and prevents leaving money on the table.
Mistake No. 5: Deducting non-eligible VAT
Certain business expenses, even if properly invoiced, do not give rise to a right of VAT deduction. SMEs often mistakenly believe they can recover VAT on all expenses, which is not the case.
Use case: a consulting company purchases a passenger vehicle for its director’s travel and deducts the VAT on the purchase (several thousand euros) in its VAT return. However, Luxembourg VAT legislation excludes VAT on passenger cars from the right of deduction (except in very limited cases of 100% professional use). Similarly, the company deducts VAT in full on restaurant expenses and business gifts offered to clients, even though entertainment and representation expenses are not VAT-deductible. In the event of an audit, the tax authorities will recalculate deductible VAT by excluding these non-eligible expenses, and the company will have to repay the unduly recovered VAT, potentially with penalties for inaccurate reporting.
How to avoid it: familiarise yourself with the legal limits of the right to deduct VAT under Luxembourg VAT law. For example, VAT on passenger vehicles, catering, entertainment or gifts is generally non-recoverable. If you carry out partially VAT-exempt activities (medical, financial, educational sectors, etc.), apply the appropriate deduction pro rata instead of deducting 100% of the VAT on your purchases. In case of doubt regarding a specific invoice, seek advice from your accountant before treating it as deductible VAT. By strictly complying with these rules, you avoid wrongly reclaiming VAT and exposing yourself to penalties.
In summary, VAT is a technical area where even minor oversights can have costly consequences. By avoiding these five common mistakes – incorrect VAT rates, omitted intra-EU transactions, late filings, forgotten purchase invoices or non-eligible expenses – you secure your VAT returns and protect your company’s financial health. Regular support from a professional accountant can also help you remain compliant with Luxembourg tax law and operate with greater peace of mind.
