Fraud and theft from the point of view of VAT and corporation tax
Nowadays we meet with increasingly sophisticated fraud and theft. The sad fact is that this often happens not only from the actions of unknown thieves and fraudsters, but also from the side of the company’s own employees and still worse, often from long-standing leaders.
The affected companies are beginning to add up the damages, and it is good to realise that this is often not just the cost of stolen goods or misappropriated money, or the cost of legal steps – the tax laws do not deal with justice in these cases. Often, as an add on to the total costs there will is the obligations to the VAT return or the submission of additional tax returns with associated sanctions also.
What happens when you find out that some of your long-term employees have done you out of property? When are there any negative tax impacts? At what date should a possible VAT deduction for business property be corrected or, if so, at what time to return it from the point of view of income tax?
Let us imagine an example from practice. The company finds out some discrepancies in its property and has a specific suspicion to unfair behaviour. There is a strong doubt, but the company is not sure about the culprit. So, the company does not prescribe the deficit to the responsible person, but announce the suspicious losses to the police. The police accuse the specific person and the dispute goes to court.
According to the VAT law, the subject of adjustment of the deduction are only concerned with the losses – deficits, which are not documented properly by the payer. According to the General Finance Directorate for documentation of proving the misapplication of the business property, it is enough to document the loss with following documents:
- by a decision to postpone the case issued by the Czech police,
- by an order to initiate criminal prosecution, or
- by an order to stop criminal prosecution.
At this time, you can be calm – the misapplication is documented by the announcement, there is no obligation to return VAT. However, if during the investigation or on the basis of the issued resolutions and judgment, it is found that the payer has allowed the theft of his or her business property (the deliberate act of the payer) and this fact is proved during the investigation, then the obligation to adjust the deduction will be imposed on the date of delivery of the protocol by the Police that the company has committed such negligence and even complicity.
According to the tax administration, evidence of a purposeful act is when the subject does not recover the damages from the person who caused the damage. Another indicator of purposeful negotiations is the situation where the payer does not document the deficit or the damage properly and the insurance company does not pay the damage, and then the insurance company will state the reasons for the non-fulfilment in its protocol on liquidation of the insured event. The same applies in the case when the report of the investigation by the Police of the Czech Republic, fire reports from the Fire Brigade point to the negligent or purposeful behaviour of a subject.
From the point of view of income tax, the situation is as follows: although it will sound strange, paradoxically the second-best result after the full compensation of the entire damage by the perpetrator, is the result of a police investigation with the conclusion “committed by an unknown perpetrator”. Then the related damages and costs are tax deductible and the company, thus, at least partially reduces its loss.
Often a worse situation arises when the perpetrator is identified, but is not actually able to pay his or her debt – the company does not apply the resulting difference as a tax expense, as well as it usually does not cover the concluded insurance. The damage to the company created by a slightly more sophisticated method may be even less pleasant – such as the unauthorised reporting of fictitious travel costs or services. The company gets into trouble not only in the field of income tax, which should be returned to the relevant period with the additional tax regulations, but also in the area of VAT deduction from these expenses. In that case, they are unjustified since the time of their application, not “just” from the moment of finding negligence.
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