VAT fraud – a risk beyond control?

Our recent experience shows that various business entities get involved in VAT fraud (e.g. VAT carousel). What is even worse, unaware of that fact they may suffer severe consequences, including financial ones.

Under Article 105a of the Polish VAT Act, the purchaser of goods assumes joint and several liability for the VAT arrears of the seller. Such liability is assumed where the conditions presented below are satisfied.

 

VAT – joint and several liability conditions

(Source: the Polish VAT Act)

Condition 1: Goods specified in Appendix 13 to the Act.

Condition 2: Net monthly purchase value of more than PLN 50 thousand per entity.

Condition 3: Upon the supply of goods, the taxable entity knows or may be reasonably expected to presume that output VAT will not be paid to the tax office.

 

Initially, steel products, fuel and gold fell within the scope of Appendix 13 to the VAT Act. Effective from July 2015, its provisions also apply to:

  • Printer toners without heads.
  • Digital cameras.
  • Ink cartridges with heads.
  • Silver and platinum which is not further processed, in the form of a semi-finished product or powder.
  • Base metals coated with silver, gold or platinum.
  • Jewelry, its parts and jewelry products made of gold, silver or platinum, or coated with noble metals.

Purchasers should pay attention to the circumstances in which the supply is made and check whether they do not differ considerably from the typical circumstances or terms of such transactions. They need to assess whether the price is justified and in addition to verifying if it is not lower than the market value of the goods purchased. The said terms are not defined precisely by the Act and it is the purchaser that assumes liability for proving that the circumstances or terms of the transaction did not have an impact on a failure to pay the relevant tax.

Joint and several liability does not apply to:

  • filling up standard built-in tanks with petrol at petrol stations.
  • situations where a failure to pay the tax was not related to “unreliable tax reporting with a view to deriving financial benefits”, to include carousel fraud.
  • cases where the applicable guarantee deposit conditions have been satisfied by the seller.

It should be emphasized that the list of entities with valid guarantee deposits, as published on the website of the Ministry of Finance as at 11 May 2016, contained only 159 names.

Will procurement and sales departments be capable of effective risk management in the race for the greatest cost savings and the highest profit? Business entities should definitely put safeguards and controls in place to analyze their contracting parties. They also ought to consider whether the terms of the purchase do not differ from the arm’s length terms and whether there are any indications that the transaction might be a VAT carousel fraud. Such measures will reduce the risk of getting involved in VAT fraud in addition to enabling the entity to avoid assuming joint and several liability. To prevent the risk effectively, knowledge of the first signs of irregularities, which should be considered by the company at all times, is necessary. Our experience shows that business entities are frequently not aware of the risk they are exposed to and they easily fall victim of tax fraud.

The issue of VAT fraud was signaled in our earlier publications of August 2014 (Recent amendments aimed at combating carousel and VAT fraud) and of November 2013 (VAT carousel fraud. How not to get involved in the mechanism?).

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