Update your VAT registration to avoid paying stiff penalties
Sometimes I think we're going around in circles. Sometimes I wonder if I'm really practicing tax, or whether I'm caught in some strange game. Let me give you an example. A few weeks back, one of my occasional clients rang me up with a question. Apparently we'd registered his company's foreign parent company for value-added tax (VAT) way back in the dim and distant past. As they are a smallish company with not many tax issues we'd not done much with them since then, and as the personnel had changed several times since that time, they couldn't find the actual confirmation of the VAT registration.
With due haste and vigor I dispatched a junior person into the archives to dredge through the dust-covered files. The first evidence we could find of the company being VAT registered was that we had issued an invoice to their London office, charged them Polish VAT, and shown the client VAT number as different from what the Polish company's was. Naturally I had to endure significant levels of abuse as to why the most perfect records were in our billing files rather than the correspondence files, but as this was coming from someone who could find nothing at all in his own files, it seems a bit of a case of "do as I say, not as I do." Anyway, we found some more proof later and could confirm that we had indeed sent him all the original documents back in 1993.
Now this is where it gets a little bit silly. No invoices had been issued, so the VAT registration was never really used. As the information was quite out of date, Polish and foreign companies both having moved office several times, we decided that we should update the details in the tax office files to ensure that invoices to be issued now incorporate the correct details. Also, we agreed that six years' worth of zero VAT returns should probably be filed just to be on the safe side.
As we aren't sure what information the tax office has (who knows what they may have been told in the intervening six years?), we asked for a copy of the "decision" issuing the VAT number.
Because of the backlog of work that they have, the tax office said it would be some time before they sent it. When we phoned a few days later to see what the progress was, they said it had already been sent, and told us the address that it had been sent to.
Needless to say this was a very old address, and was the address of the Polish company, which had been given as a correspondence address. The Polish company is no longer there, and the parent company was never there in the first place. We sent someone there to ask the building security if they were holding any mail for the company, and they remembered the letter, but said that they'd sent it back to the tax office as nobody had even heard of the company there.
Off we went to the tax office, and there we hit a wall.
As the company had moved, the tax office told us we were very naughty for not having told them that the address had changed. Our reply that, as the form reporting the change has to show the old and the new address, we needed to know what old address they had before we could tell them the new address, was apparently no excuse.
Long arguments followed, with the only agreement being that both parties agreed that one side of the discussion was being completely unreasonable. The tax office's view was that clearly the company was in violation of the requirements of the law (agreed) and that this means that the company will be in trouble.
Now, my view of these things is that despite everyone's attempts to be perfect, companies sometimes make mistakes, or do something not quite perfectly. If they discover this, then they should be able to correct this with the minimum possible sanctions from the tax office. Reluctantly I will even admit that interest should be paid, to ensure that the taxpayer does not gain from not making his tax payments on time. Clearly there is an issue as to whether increasing the penalty interest rate to 43% recently encourages taxpayers to suffer selective amnesia rather than come clean.
Also, you need to factor in the detection risk. One of my colleagues came back from abroad with a great story of another country (which shall remain nameless, but is generally considered to be one where tax avoidance is a national sport), where penalties for non-payment are 100% of the taxes due. However, as the statute of limitations is five years, and tax audits typically happen every 13-14 years, you can still potentially gain from playing the detection risk game.
But that's not good tax policy. Most companies I know do want to be honest and legitimate on their taxes, and if mistakes are made do usually want to correct them and grudgingly pay reasonable penalties and interest. Giving big penalties for trying to clear things up encourages people to do absolutely nothing. (In this case, if we'd never said anything, then chances are that the tax office would never have even realized that this company had not done anything, and would probably have ignored it).
So where does this company go next? Well, the tax office has refused our help in trying to regularize things, and says that they will pursue the company for non-filing of six years' worth of VAT returns. Quite how they will contact the parent company if all the letters are being returned to them from an office that the Polish company moved out of several years ago is an answer I am very interested in finding out! I wish them the best of luck.
Peter Ferrigno is a tax manager in the Warsaw office of Arthur Andersen.
