VAT filing in perspective, if you do it wrong you can go to jail for nine months

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VAT stands for Value Added Tax and that is the department with the tax office that takes the reporting even more secure, you can end up in jail.

What is Value Added Tax?

Value Added Tax (hereafter: VAT) is basically sales tax. All companies charge VAT unless the company is exempted from VAT to be charged. Banks, mortgage providers and some educational institutes are examples of VAT exempted companies.

The VAT rate is 21% and sometimes 9% if the product obtained is vital for life. So you see the 9% often used for food products.

The moment you operate a company then you need to charge 21% VAT to your clients. If your clients are private individuals in the European Union, you always charge 21% VAT. If your clients are companies, than in the Netherlands you charge 21% VAT, outside the Netherlands but inside the EU you charge under conditions 0% VAT and outside the EU no VAT is being charged.

The thought is that the VAT is cost neutral for the entrepreneur who is charging the VAT.

Example:

The product or service costs EUR 100. The entrepreneur charges EUR 121 and upon receipts the EUR 100 is for the entrepreneur and the EUR 21 needs to be paid to the tax office.

You can then argue that the Dutch entrepreneur who receives this EUR 121 including VAT invoice is not neutral, as he now pays EUR 121 for the product instead of EUR 100. Therefore the entrepreneur who paid the EUR 121 can claim back from the tax office EUR 21. Hence the cost of the product is then EUR 100.

Value Added Tax
Value Added Tax

How is VAT reported?

The VAT is reported to the tax office often at a quarterly basis. The first quarter is January to March and then in April the VAT is filed. Hence in April, July, October and January tax consultants are busy filing VAT returns. Of course you can do it yourself as well.

The accountant is then asking you to provide the full bookkeeping. The full bookkeeping are all the invoices issued in the period of the quarter that needs to be filed. Whether the invoices are actually paid or going to be paid is not relevant.

You also need to provide all the costs charged to you for the company. Some carry VAT, some do not carry VAT. If the invoice is not correctly issued, so the company name is not correct mentioned, or other aspects are not being met, the VAT cannot be reclaimed. If the VAT amount is not explicitly mentioned on the invoice (with exception to companies as public transport and taxi companies) no VAT can be claimed back.

I have once been told in a VAT course that you need to see the costs invoice as a banknote. Do you accept a EUR 50 banknote that does not actually state EUR 50 on it, or is cut in half, or falls apart? I doubt you do. This is how you need to treat the VAT reporting with the invoices you issue and the invoices you receive. If the VAT is not correctly processed, basically it is a false banknote and you cannot claim back the VAT. Or if you issued a 0% invoice to your EU client and the conditions are not met on the invoice, is it no longer a 0% invoice, but you (not the client) need to pay 21% VAT over that 0% VAT invoice.

How can you end up in jail?

You can laugh about this, and often my clients do when I mention jail time if you do this wrong. But it is not a joke.

The tax office connect the wrongfully filed VAT return directly with money laundering. You are basically laundering ‘false banknotes’ for money in the refund. Money laundering is a criminal offence. That is how you can end up with jail time.

Court case:

An entrepreneur provided his bookkeeper with his administration and then the bookkeeper filed the VAT returns. The entrepreneur had never provided the correct administration to the bookkeeper but skimmed some of the turnover and did not report cash received payments. Over a period of time, and often audits are done per five year period, the entrepreneur had paid short EUR 217.155 VAT. This in connection with other irregularities the entrepreneur did in his company, he was sentenced by the court for one year in prison. However, as the court case took a long time the period was reduced to nine months.

Imagine that, actually going to jail because you thought you were so clever! Even worse, the tax advisor who did the filing of the VAT returns need to be certain he could not have been aware of the skimming, otherwise the tax advisor is sentenced as being part of the fraud.

Orange Tax Services

New entrepreneurs we strictly explain how we like them to provide the bookkeeping to us. Might be considered a bit childish being told what to do as if you are a schoolboy, but we serve a greater good: Complying with the rules. Maybe not as exciting, but in the long run you will be thankful.