VAT Audit

What is a VAT audit?

1. Tax audit aimed at identifying fictitious invoices and fictitious contracts.

A “fictitious contract” and the “fictitious invoice” issued on the basis of such a contract mean that the tax authority does not accept the economic transaction allegedly performed under the contract, or claims that although the economic transaction did take place, it was not carried out by the entrepreneur, contractor or subcontractor, meaning that the transaction did not take place between the contractual parties.

A tax audit aimed at identifying fictitious invoices starts as an audit focusing on the fulfilment of specific tax obligations; however, since this type of audit examines only our invoices and contracts, the tax authority subsequently orders a retrospective audit of VAT returns. In many cases, the audit affects us as a related audit, meaning that it arises during the examination of another company’s invoices.

It may already be considered suspicious if the tax authority examines not an entire year, but a specific period or certain periods, as this usually indicates that an economic transaction occurring in that period is considered fictitious by the tax authority. However, it can be clearly concluded that the audit is aimed at uncovering fictitious contracts and invoices based on the nature of the specific questions delivered in writing at the commencement of the tax audit or asked during the personal hearing.

What may be considered most suspicious by the NAV?

• Subcontractors further subcontract the work, and these subcontractors can no longer be found, are under liquidation, or a change of ownership has taken place since the contractual relationship.
• Documents proving the performance of the work are missing.
• The subcontractor did not have a sufficient number of employees or did not possess the appropriate expertise to perform the work.
• The subcontractor does not submit tax returns.
• Invoices were settled in cash.

If the tax authority establishes that a contract is fictitious, the accounting of the related invoice or invoices is also incorrect. In most cases, this also affects the contract and invoices of the contractual partner. If the tax authority classifies a contract as fictitious, VAT and corporate tax liabilities are retrospectively assessed, resulting in a tax shortfall, as well as the imposition of a tax penalty of at least 50% and an obligation to pay late payment interest.

In connection with the use of fictitious invoices, it must also be taken into account that this entails criminal liability.

2. Establishment of concealed income

During a VAT audit, concealed income is substantiated by means of an estimation procedure.

3. Accounting for expenses not serving the business activity

This occurs when expenses not related to the business activity are accounted for, especially if this happens repeatedly. In such cases, a VAT shortfall is established together with the related sanctions, as the invoice relating to the purchase was unlawfully included in the company’s accounting records. In such cases, the purchased items may obviously not be included among deductible costs.

The most common reasons for ordering a tax audit

Related audit

The tax authority conducts a VAT audit at a company connected to us, and questions arise in relation to an invoice or contract. In such cases, the tax authority examines and clarifies the contractual relationship within the framework of a related VAT audit.

The most common problem during a related VAT audit is the contradictory statements made by the two parties, or the complete absence of any statement.

Refund claim

In the case of a VAT refund claim, the tax authority orders a pre-refund VAT audit.

Tax minimisation, continuous losses

One of the main selection criteria of the tax authority’s selection department is the auditing of tax minimisers, based on available tax returns and annual financial statements. Companies continuously declaring losses or failing to achieve minimum profit levels within their sector can particularly expect VAT audits. Identified issues may result in further tax audits, including wealth increase audits of the owners.

Acceptance of fictitious invoices

If the tax authority determines that a transaction or a company’s operation is fictitious, it also designates the connected businesses for tax audits.

Failure to submit returns

The tax authority strives to conduct VAT audits at companies that fail to submit their tax returns; however, due to the large number of such companies, it is not able to conduct audits in all cases. The real problem is that in many VAT audits, the basis of the assessment is the fact that the customer’s supplier or subcontractor did not submit a VAT return. Due to tax secrecy, only the tax authority can verify this. In such cases, the tax authority should act much faster and suspend the tax number so that contractual partners can also see this.

Notification

A typical reason for ordering a VAT audit is a public-interest notification. These are the so-called “letters from well-wishers” submitted to the authority’s department established for this purpose.

Consequence of an operational audit

If a tax inspector conducting a test purchase does not receive a proper receipt for the purchase, a VAT audit can be considered certain. In many cases, the inspector does not reveal their identity during the test purchase, and later verifies during a VAT audit whether the taxpayer included the issued receipts in their accounting records.

Audit of specific tax obligations

A VAT audit often starts as a continuation of an audit of specific tax obligations. The reason is that this type of audit verifies the existence of documents, and the authority already has the documentation available for continuation. When the documentation is presented, the audit itself cannot establish a tax shortfall, but it provides access to the documents necessary for the VAT audit, and upon closing the examination, the authority may immediately issue the authorization letter for the VAT audit.