Unknowing participation in tax fraud is room for the tax administrator to assess additional VAT on you. What to do about it?

Among the basic principles of the common VAT system in the countries of the European Union, one can consider the right of taxable persons to claim the deduction of VAT paid on the purchase of goods or services for their business in the domestic market, as well as the right to claim VAT exemption when supplying goods to other member states.

However, in order for an entrepreneur to be able to exercise these rights, the so-called substantive and formal conditions must be met, which are specified in more detail by the Value Added Tax Act. If an entrepreneur is sure that they have met these conditions and that, in the event of a possible tax audit, they would be able to credibly prove their fulfilment, they assume that the VAT deduction or VAT exemption cannot be denied to them by the tax administrator, and so they claim them.

However, many entrepreneurs currently do not know that precisely in such a case the tax administrator can take an additional step, namely applying the new line of fraudulent conduct in the chain. As a final consequence, it thus denies the entrepreneur the VAT deduction or the VAT exemption of the supply.

The new line of argument of fraudulent conduct in the chain consists in the fact that during a tax audit the tax administrator does indeed conclude that the supply of goods or provision of service from which you claim the VAT deduction actually took place, and also concludes that the substantive and formal conditions for claiming the VAT deduction were met, but in the given supply chain it identifies an entity that committed VAT fraud and describes this fraud. The tax administrator then links the described tax fraud with the supply of goods or provision of service from which you originally claimed the VAT deduction, even despite the fact that you did not know about this tax fraud. It is similar in the case of fraud involving goods supplied to another member state, where the fraud occurred in the customer chain.

Pursuant to the case law of the Court of Justice of the European Union, in the interest of preventing tax fraud, tax entities may be required to verify all their suppliers or customers, and this not only when concluding contracts initially, but also repeatedly during ongoing cooperation. Insufficient verification of a supplier or customer (who is part of the tax fraud, even though you do not know about it) makes you a tax entity that is notionally involved in this fraud. The tax administrator applies a legal fiction that, although you did not know about the tax fraud, you could have known about it, since you did not verify the reliability of your supplier or customer.

In an ongoing tax audit in which the tax administrator applies the new line of fraudulent conduct, you will be allowed to prove in what way you verified the reliability of your supplier or customer in advance. If insufficient verification is proven, the tax administrator will be able to deny the VAT deduction. Similarly, the tax administrator will be able to deny the VAT exemption of the supply of goods to another member state.

If you are interested in more detailed information about the options for how to defend yourself during an ongoing tax audit, or how, as part of prevention, to set up an internal mechanism for verifying the reliability of your suppliers or customers, do not hesitate to turn to the team of experienced professionals in the field of tax advisory from VGD SLOVAKIA s.r.o.

Source: VGD