Tax audit

For several years, the managing director of a limited liability company entrusted the bookkeeping and preparation of corporate income tax returns to a person who was related to one of the partners.

The cooperation went smoothly, and no-one anticipated that there might be any deficiencies in the preparation of the accounts or that the income tax return would not be prepared in accordance with the Income Tax Act.

After years of relative calm with the tax authorities, the tax office carried out an audit of both income tax and VAT for the last two tax periods.

The company’s representatives had submitted all the required documents to the tax office and assumed that they would be notified after a few days that everything was in order.

Unfortunately, everything was not in order. The tax authority’s audit department found that:

• all non-alcoholic beverages consumed at the workplace were included in the tax base, while the vast majority of them were also subject to input VAT
• furniture for a building used as a summer retreat for employees’ children was charged as tax-effective costs; VAT was also claimed on these purchases
• for two employees who may also use company vehicles for their private purposes, this was not taken into account in their wages, i.e. 1% of the purchase price of the cars was
• not subject to health and social insurance contributions and income tax on employment income
• tickets for football league matches were included among the tax deductible costs
• interest on loans from shareholders, which were of relatively high amounts but had not yet been paid, was retained as an amount reducing the tax base
• inconsistencies were found in the records of journeys made by company vehicles between the place of refuelling and the place where the vehicle was supposed to be
• according to the logbook; these journeys could not be recognised as related to the company’s economic activities
• the company failed to discharge its burden of proof in respect of a trip by its management to Morocco, which was accounted for as a business trip and a place where management training was carried out
• the number of electric bicycles and motorcycles included in the assets does not correspond to the actual needs of the employees, and even exceeds them
• the consumption of electricity at some points of use was not time-stamped
• the provision for untaken leave was retained as a tax-effective expense.

Furthermore, it was found against the company that it was able to reduce its tax base by gifts given to persons for whom the law allows it, and its tax liability by employing disabled persons, one of whom had even more severe disabilities.

The company was charged both income tax andVAT for the audited periods. It was also penalised with interest on late payment and penalties, which were not insignificant amounts.