Protection against VAT fraud

Do not pay tax for fraudsters, set up control measures

Up to 70% of companies do not consider the risk of unconscious involvement in VAT fraud to be real. This leads to a lack of measures that would identify these risks and decrease their impacts. However, the consequences for the company can be catastrophic, as evidenced by the following experience.

A Czech company had been on the market for almost 20 years when its stable business partner offered it an advantageous purchase of goods that were currently in high demand. All it took was a quick calculation and it was decided. If the deal works out, it will not be necessary to lay off employees. The deal went well, but the company does not exist anymore. The tax authority came and accused it of being involved in VAT fraud. One of the subcontractors that the company was never in contact with apparently failed to pay VAT. The company’s entitlement to deduction was retrospectively revoked and additional tax was assessed in an amount that greatly exceeded the company’s financial ability. Orders of seizures and the subsequent execution completed the destruction. A company that has always properly fulfilled its obligations suffered the consequences of dealing with fraudsters. It did not have demonstrably set-up sufficient control measures that could have allowed it to discover potential fraud. Do not let this happen to you!

Fight against VAT fraud, new in the area of tax audits

It does not happen just in the Czech Republic but across the EU, with the blessing of the Court of Justice. Tax administrations fight against tax evasion and for higher VAT collection and they increase the number of tax audits. There is an increasing number of cases where businesses are liable for the unpaid tax of their suppliers. Or their entitlement to VAT deduction is not accepted precisely because one of their subcontractors or their business partners did not pay VAT.

70% of companies still do not consider the risk of unconscious involvement in VAT fraud to be real, but…

... 87% of total additionally assessed tax in 2015 was VAT
54% of tax audits and 73% of doubt elimination procedures regarding tax returns concern VAT
every second VAT audit procedure ends with a different amount of tax
… the difference between declared and assessed VAT amounts to CZK 13 billion
… the number of unreliable payers is close to 6,500 and growing fast

What does the company risk if it is unknowingly involved in VAT fraud?

  • Rejection of the VAT deduction claim;
  • Liability of the recipient of the supplies for the tax not paid by the direct supplier;
  • Retaining of the utilised excessive VAT deductions;
  • High costs of the tax audit and the subsequent legal dispute;
  • Damage to the reputation;
  • Bankruptcy (reorganisation); and
  • Criminal liability of the company and its representatives.

How to get out of this?

Tax authorities require the taxpayers to prove that they adopted appropriate precautions against involvement in tax fraud. The company therefore has to set up sufficient control measures (with respect to the possibilities and habits of its business) and regularly screen its business partners.

For this reason, Deloitte brings a set of tax and legal services that help companies minimise this risk by introducing a comprehensive process of control measures in approximately six weeks.

Steps for the introduction of the process

  • Definition of control measures – Set up of such control measures that will help the company identify potentially risky business partners.
  • Contract review – Contracts with business partners and employees are set in a way that protects the company.
  • Employee training – Each employee knows their role in the process of review of business partners and is aware of the related responsibility.
  • Software tool for ongoing checks – Automated tool for ongoing checks of the risk level of business partners.
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