Operating in the Netherlands as entrepreneur is operating in a good environment. Nearly everything can be done electronically, swift responses and your tax returns you can be done online. This good environment will come to a sudden stop when you do not comply with the tax rules. Here is an example creative invoicing.
Company issuing backdated credit invoices
An advertisement sales company invoiced potential clients up front to make them become a client. Invoicing implies that you send an invoice plus VAT. Most ‘clients’ were not interested in the offer made via an invoice and never paid the invoice.
For your information, in the value added tax (VAT) legislation it is explicitly stated what the obligations are for a VAT entrepreneur with respect to the moment VAT is due and with respect to the contains of an invoice. VAT is due in the VAT return over the month or quarter the VAT invoice is issued. The invoice date determines which month or quarter that is. The moment of actual payment of that invoice is of no interest for this legislation.
With this knowledge, knowledge that is shared by every tax consultant assisting a VAT entrepreneur in his tax filings, you might already see what is coming. The invoices this advertisement sales company send to ‘potential’ clients that turned out not to be clients at all, contain VAT and an invoice date. The invoice will most likely not be paid, but the VAT on the issued invoices is due on the next VAT return. The amount of VAT due in this case was EUR 319.174.
Anticipating the problem at hand, the advertisement sales company had a solution for the fact that they cannot pay for the EUR 319.174 VAT. They simply issued credit invoices. As discussed in our blog before, credit invoices need to meet certain criteria. The credit invoice needs to contain the debit invoice number that is being credited, without this item, there cannot be a credit invoice. And the credit invoice needs of course to have a date. This date determines in which VAT return the credit invoice reduces the VAT amount due. This advertisement sales company simply issued the moment it became clear the ‘client’ would not pay the invoice a credit invoice and they back dated the invoice to the moment the debit invoice was issued. By doing this, no VAT would be due for invoices that were not paid. A cash flow issue solved. But if this company would have known what they started, they might not have used this work method, but maybe send out offers instead of invoices.
Tax audit is as thorough as you think it is
The tax office started an audit and when the tax office has indications of fraud. The tax office knows how to be thorough. The audit did not start with this advertisement sales company, but with its ‘clients’. The clients were asked to provide information about the invoices of this advertisement sales company. This right the tax office has with article 47 of the Algemene Wet (General legislation rule). Sometimes it is good to protest against this request to provide information, only for the purpose to prevent yourself from a potential claim the company actually under investigation can make against you for providing too easy the details. But this is more legal issue than reality, reality learns you that a protest is time consuming and will lead nowhere, you have to provide the details.
This peripheries audit learned the tax office that even though the company had made credit invoices, these invoices were never issued to the client. If you know that the VAT system is a closed system, one company pays the VAT and the other reclaims the VAT, then not issuing an invoice breaks the system and costs the tax office money. Such a drain is something the tax office will always chase.
The tax office started the audit with the advertisement sales company and asked questions for which they already had the answers. The court agreed with the tax office that the company had committed an offence. Not only they had to pay to the tax office the EUR 319.174 VAT they reclaimed as being credit invoices, on top of that a 75% penalty was issued for the amount of EUR 239.380.
Blame the bookkeeper
The company tried to blame the bookkeeper/tax consultant. They always do that. To the court it was very clear this was a false statement as you will not find a bookkeeper still in business that actively advises on back dating invoices. Legislation has changed a couple of years ago in a manner that also the bookkeeper/tax consultant can go to jail for helping the client commit fraud.
The end is always the same: bankruptcy
Apparently the process took longer than expected, hence the court reduced the EUR 239.380 fine with EUR 5.000 to EUR 234.380 as compensation to the lengthening process. We are not sure why such a silly gesture has been made, as we cannot imagine this company can pay for any of these amounts. The total amount due is EUR 319.174 plus EUR 234.380 is EUR 553.554 being the VAT plus penalty for invoices that never have been paid. This implies bankruptcy and I hope he had a good tax consultant, as if the wrong structure has been used, or the right structure was used but badly managed, then this sales person is also personally bankrupt.
Our goal is to assist an entrepreneur with his value added tax bookkeeping in such a manner that the above does not happen. We might act like a school teacher on what is right and what is wrong in an invoice, or in the moment of invoicing, but being compliant is too important. We even contact the suppliers of our clients if they send wrong debit/credit invoices to our client. This is not done to gain a new client, this is done to prevent our client getting fined for an invoice a third party send. We charge EUR 100 ex VAT per hour bookkeeping, maybe not the cheapest, but then again cheap can become very expensive as you have read above.