The VAT Directive provides for a whole series of VAT reporting obligations: businesses must issue invoices that include mandatory mentions to their customers, they must keep appropriate bookkeeping, file VAT returns periodically, keep various ledgers, pay VAT within the required legal deadlines, etc.
Entirely complying with all the VAT rules is a real challenge.
Beware of financial penalties !
Businesses should not count on the help or indulgence of the tax authorities. Quite the contrary! Mistakes, even those made in good faith, are paid for in cash!
Each European country has a veritable arsenal of financial penalties in its domestic law for all errors and inaccuracies. Administrative fines are imposed for incorrectly filled in registration forms, for issuing inaccurate invoices, for late submission of VAT returns, for poorly structured communication on a payment order, for incomplete accounting ledgers, etc.
The fines imposed can be fixed (e.g. € 500 for a late return) or correspond to a percentage of the VAT (e.g. 20% of the VAT due for an undeclared sale). They are sent to the taxpayer either automatically or following a tax audit.
Let's take an example
A business submitted a mandatory appendix to its VAT return in the Czech Republic (the famous "VAT Control Statement”).This statement should mention the address and the number of clients in two separate columns. The box “Street” mistakenly contained the client's zip code.
What are the consequences of this typo?
CZ VAT authorities imposed a fine of 50,000 CZK because the original submission was assessed as failed !! (see aff. 43 Af 6/2020-37)
How do you dispute a fine?
So what should you do when your company receives a VAT fine? Is it possible to contest it?
Yes, with the proportionality test.
You should know that the State's power to impose penalties is not unlimited: it can, of course, impose a fine in the event of a company's failure to comply, but this financial penalty must be proportionate to the seriousness of the offence. To put it another way, the penalty must not go beyond what is necessary to achieve the objectives of collecting the tax correctly and avoiding fraud.
This is the philosophy of the Court of Justice.
In order to assess whether a penalty complies with the principle of proportionality, the Court asks to take into account two parameters:
A) The actual nature of the infringement
A business that does not comply with its VAT reporting obligations commits an infringement. But what is the real nature of this infringement? European case law is unequivocal: the reporting obligations (accounting, invoicing, declaration) are not substantive conditions but are mere formal requirements imposed by the VAT Directive on businesses and are necessary only for control purposes.
B) The seriousness of the infringement
How serious is the breach of a reporting requirement? A breach of a formal requirement will not be considered serious if it does not prevent the tax authority from carrying out its control and verifying that the substantive conditions are indeed met.
The actual nature and seriousness of the offence will have to be put into perspective with the method of determining the amount of the penalty (fixed or proportional).
It is this exercise that will make it possible to determine whether a fine is proportionate or not.
To keep in mind
The rules of the VAT game are complex and mistakes made by companies in the management of their reporting obligations (e.g. inclusion of a transaction in the wrong box of a VAT return) are frequent.
The bad news? Each error is usually subject to an automatic and immediate financial penalty.
The good news? The company that has to pay a penalty can defend itself. The penalty imposed by the tax administration must be proportionate to the objectives set by the VAT Directive, i.e. to ensure tax collection and to prevent fraud.
In this respect, the use of the proportionality test can be extremely effective in forcing the tax administration to temper its enthusiasm.
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