Common Financial Due Diligence Mistakes #3: Underestimating VAT Risk in Non-US Entities

When analyzing non-US targets operating in VAT jurisdictions, buyers sometimes accept revenue figures that have been adjusted to “align with US reporting,” without fully understanding the VAT mechanics. We have seen cases where sellers artificially increased reported revenues by adding VAT, arguing that VAT is not applicable in the US. While the gross amount collected from customers may be the same, VAT is not revenue—it is a pass-through tax and represents a credit or liability to the tax authority. In one case involving an Australian seller, VAT (GST) amounts were added to revenue, creating fictitious top-line growth and inflated EBITDA, despite no change in underlying business performance or cash generation. Lesson: VAT should never be treated as revenue. In cross-border transactions, revenue must be reconciled net of VAT to tax filings and cash collections to avoid overstated earnings and misleading valuation conclusions. How we help: At Centurica, our Quality of Earnings reviews include detailed balance sheet and P&L analysis, revenue and expenses normalization, to ensure buyers are valuing businesses based on true, sustainable earnings—not accounting distortions.