In the course of an audit of engaging in business, the representative of the taxpayer appeared before the tax authority and gave explanations and, later, by e-mail, replied to questions that remained unanswered upon giving explanations. The company submitted documents set out on 46 pages regarding transactions with various companies and selective bank account statements of the company. However, the taxpayer did not submit all the requested documents. The tax authority also argued that the explanations of the person having the right of representation were too general. The taxpayer did not have any expenses that would prove daily business operations, e.g. expenses on telecommunications, office and salary. The tax authority argued that the submitted evidence was insufficient to prove engagement in business. The claimant did not perform the duty to cooperate, because it failed to submit other documents requested by the tax authority. The tax authority identified that the taxpayer submitted evidence of merely 12.59% of the transactions. To the remaining extent of 87.14% the company has made transactions with companies that are not available to the tax authority.
The taxpayer countered by arguing that the submitted documents sufficiently proved its business. The total value of the transactions not questioned by the Tax and Customs Board exceeds the threshold of registration as a person liable to VAT, which is established in subsection 1 of § 19 of the Value Added Tax Act, upon exceeding which a person is required to register themselves as a person liable to VAT. In other words, on the one hand the tax authority deleted the person from the register, but on the other hand the total value of the transactions acted by it exceeded the threshold of mandatory registration. Thus, the taxpayer should register themselves as a person liable to VAT immediately after being deleted from the register.
The Supreme Court has noted before that, according to the wording of subsection 31 of § 22 of the Value Added Tax Act and the explanatory memorandum of the Act, the taxpayer is required to prove that it engages in business.1 Thus, it is up to the taxpayer to prove that it is engaged in business. If the taxpayer has submitted a sufficient amount of documents and given explanations in proof of engagement in business, the fact that the taxpayer did not submit all the documents requested by the tax authority or that the tax authority disapproves of its tax behaviour does not mean that the person is not engaged in business or that the person has not submitted documents in proof of engaging in business.
An audit of engagement in business is a special type of tax audit, which may result in deleting a person from the register. The purpose of verifying a person’s engagement in business is not the auditing of the correctness of the accounting and payment of taxes by the person or assessment of the person’s tax liability.
In the present case the tax authority commenced an audit of engagement in business, demanding that the person submit virtually all the accounting documents regarding the audited period. Such an amount of demanded documents is characteristic of an audit of the accounting and payment of taxes (audit of an isolated event or a tax audit). It is not necessary to submit such an amount of the accounting documents of a company in the event of an audit of engagement in business. Demanding detailed information on all the transactions and transaction partners of a person is also beyond the boundaries of auditing engagement in business.
Under § 2 of the VATA, business for the purposes of the VATA means independent economic activities in the course of which goods are sold or a service is provided, regardless of the purpose or outcome of the activities. No conditions to the scope of the economic activities have been established upon substantiating the definition of business.
The Supreme Court did not agree with the court of appeal in that a person can be deleted from the register of persons liable to VAT irrespective of the fact that the person's engagement in business is proven, provided that the tax authority has a reasonable doubt that the company is used for committing VAT fraud and the person has been unable to refute the doubt. The VATA lacks such grounds for deleting a person from the register of persons liable to VAT. Therefore, the deletion of the person from the register cannot be lawful even if the tax authority’s suspicions are confirmed in later audit proceedings. Deletion from the register based on subsection 31 of § 22 of the VATA would be lawful if the person has not at all proven engagement in business.
The fact that the person failed to submit some of the documents demanded by the tax authority does not serve as the basis for deleting the person from the register of persons liable to VAT. An audit of engagement in business has a considerably smaller scale than an audit of payment of taxes.
1 Judgment of 7 May 2015 of the Administrative Chamber of the Supreme Court in case no. 3-3-1-17-15, para. 15.
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