The tax audit is guaranteed at the 1,500 taxpayers selected if, according to control data, the difference concerning VAT is above 1 million forints. Taxpayers carrying out a substantial part of their domestic acquisitions with partners under compulsory strike-off from the trade register can also expect an audit.
Differences of online invoice data reporting
It is undoubted that since its introduction, online invoice data reporting serves the audit interests of the tax authority real-time providing authority databases with a wide range of data and serving as a valuable source for the application of the block-chain and big data technologies envisaged as future targets by HU TA.
If the audit actually identifies non-compliance, the taxpayers selected due to failure to meet their data reporting obligation (or delayed fulfilment or reporting of incomplete, erroneous or untrue data content) can expect a penalty. In addition to the penalty and late payment fee imposed on potentially identified tax differences, a default penalty of up to 500 thousand forints may be imposed for each invoice concerned by the non-compliance on businesses and a default penalty of up to 200 thousand forints for each invoice concerned by non compliance on private persons.
The cap on the default penalty that may be imposed per invoice is very high. However, it is imposed according to the general rules in two steps and its application and amount are, in theory, not automatic. First, HU TA calls defaulting taxpayers to correct the deficiencies and the penalty is only imposed if the taxpayer fails to comply with this request.
In our previous posts, we described in detail the rules relating to the fulfilment of the online data reporting obligation. The company's fulfilment of the data reporting obligation in itself is not enough. A number of issues may come up in the data reporting system, data reporting should therefore be back-tested and the data reported on the company by other persons should be reviewed.
How can the data reported and the data available at HU TA be matched?
All taxpayers have the right to inquire invoicing data relating to them or reported on them by other persons. After the receipt of these, the data can be compared to the company's accounting records. This is without doubt time consuming and above a certain volume of data the process also carries the chance of errors. ConnecTAX Invoice Zoom offers a solution for this problem with automated processes for the selection, listing and correction of differences in order to prevent penalties.
What you should know about companies undergoing compulsory strike-off procedures
We must also pay attention to the last half sentence of the communication of HU TA that a HU TA audit can also be expected by the taxpayers carrying out a substantial part of their domestic acquisitions with partners under compulsory strike-off from the trade register*.
*The court of registration orders the compulsory strike-off of the company from the trade register if it declares the company terminated acting in within its legality supervision capacity, if the company failed to complete the voluntary dissolution within three year's time, if the company failed to transfer to the general rules of voluntary dissolution or if a reason for the termination of the company without legal succession occurred and the voluntary dissolution procedure is not applicable. The procedure is not voluntary but a consequence of the illegitimate operation or infringement of the company concerned and is an irreversible procedure for the termination of the company.
What does this mean from the perspective of VAT deduction?
It is a fundamental right of taxpayers to deduct the input tax on the goods and services they acquired from the VAT payable by them if the transaction is fulfilled and the invoice certifying the transaction satisfies the requirements of the VAT Act, i.e., according to the main rule, the right of tax deduction cannot be restricted.
Taxpayers select their business partners themselves, however, the judicial practice of both Hungary and the Court of Justice of the European Union require taxpayers to apply the due care expected in business in relation to the deductibility of the input tax on acquisitions, which covers both the selection of the partner, the conclusion of the contract and the fulfilment of the transaction. This practically extends to acquiring the most comprehensive information possible on business partners, including the checking of their company law status (and reasonable regular monitoring during the business relationship).
If HU TA proves based on objective circumstances that the party accepting the invoice played a role in a potential tax evasion or fraud, the taxpayer's right to tax deduction can be denied in relation the acquisitions under review.
We need to point out that the right to tax deduction cannot be denied automatically on the grounds that the partner in question is under compulsory strike-off from the trade register. The right to tax deduction may not be denied on the basis of an infringement within the sphere of interest of the issuer of the invoice of which the party accepting the invoice was unaware or could not have been aware and which was beyond such party's control.
However, this circumstance undoubtedly indicates that the operation of the partner is not necessarily impeccable. For this reason, if this is revealed to the taxpayer, enhanced care must be applied for it is an objective fact whether there is any indication a public register that the partner in question is under compulsory strike-off from the trade register.
"Companies should be aware of the fact that according to the Company Act, companies undergoing a compulsory strike-off procedure may not perform economic activities in a business-like manner! During the procedure, the representative of such company must proceed taking creditor interests into account and from the starting date of the procedure, the representative may not dispose of the assets of the company (with the exception of certain specified assets)!”
Of course, this does not mean that the transaction concluded between the parties is void from a tax law perspective. Questions of civil law are regarded separately from tax law classification as the Tax Procedure Act lays down as a basic principle that void contracts or other legal transactions only have relevance for tax purposes if the economic result of such contract or transaction is detectable. The fact that the given behaviour violates law does not influence tax liability.
Therefore, if the acquisition of the product/service is completed physically (even though in violation of the above referred legal regulation) from a company undergoing compulsory strike-off from the trade register, this status of the issuer of the invoice in itself does not constitute the transaction void and HU TA has both the right and the obligation to determine the tax law consequences of the transaction. If tax evasion by the partner or a previous player in the supply chain undergoing compulsory strike-off from the register arises, the taxpayer acquiring the goods/services can expect a high chance of the audit establishing comprehensive knowledge of the tax evasion denying the right to deduct the input tax on the acquisition.
What can we do if a partner is or was under compulsory strike-off?
First of all, companies should check the company details of their supplier partners (based on court of registration records and databases available on the HU TA website),if possible within the term of limitation.
If a partner under a compulsory strike-off procedure is identified, we should check during which period the procedure was in progress and whether any domestic acquisitions took place during this period.
We should also check the invoices concerned (the content of the product/service acquired) and the documents certifying performance. If little or non-convincing information is available or if the partner is no longer available or if incriminating information is found in the HU TA databases , the company should review its tax return and (if the risk is substantial) apply self-revision. This is a difficult question to judge and an expert may need to be involved.
Our employees can help your business during both the review of your partners before a tax audit and during the tax audit also.