The Cabinet of Ministers toughened rules for registration of VAT invoices. What problems has the business already faced and what more may it still encounter?

According to Danylo Hetmantsev, сhairman of the parliamentary Сommittee on Finance, Tax and Customs Policy, at the beginning of October, the arrears of VAT refunds to business was about UAH 6.7 billion. At the same time the official assures that the refund system has been operating regularly since the summer. However, VAT payments are made with a two to three weeks delay. We are told that we must be patient.

However, the business claims the contrary. In late September, the Ukrainian Agribusiness Club (UCAB) reported that the VAT refund system does not really function. Moreover, 95% of the amounts of VAT claimed for refund are subject to inspections. Having called on the authorities to urgently resume the process of VAT recovery, the European Business Association (EBA) also speaks about the difficulties with refunding and that inspections greatly constrain this process.

But no one has really listened to the wishes of business so far. Moreover, on 12 October, by adopting Resolution No. 1154 the Cabinet of Ministers updated the procedure for blocking VAT invoices and adjustment calculations (AC). It came into force on 14 October. The new rules only complicate the process of VAT invoice registration and will create even more problems for VAT reimbursement.

What changed in the registration of VAT invoices. There are four main innovations related to the blocking of VAT invoices and AC. Namely:

• stricter requirements to risk criteria, due to which most of the reduction AC (that provide for the reduction of the amount of reimbursement of the cost of at least one of the goods/services to their supplier) will fall under monitoring;
• the suspension of registration will be applicable not only to those VAT invoices and AC that have already been drawn up, but also to those submitted for registration;
• expanded list of cases when a special commission under the State Tax Service (STS) will be able to "manually" reject the taxpayer's data table (containing information on the specifics of the VAT payer's business), even if it is recorded automatically;
• the riskiness criteria have been clarified, therefore, the STS will not only check the goods balances falling into the risky category, but also basically all VAT payer’s goods.

Nuances of "negative" invoices. If we look at the changes in the process of VAT invoice registration  introduced by the Resolution No. 1154, there will be a number of threats that may lead to blocking of VAT invoices.

First and foremost, the unconditional (automatic) registration of adjustment calculations made by the supplier of goods/services to the VAT invoice for the recipient-taxpayer is impossible, if these calculations provide for the reduction of the amount of reimbursement of the cost of at least one of the goods/services to their supplier.

"The ‘blocking trap’ here is that the transaction on reduction of the amount of reimbursement provides for non-compliance with the features of unconditional registration of any AC, as it contains a line with a negative value. That is why most of the adjustment calculations will be subject to monitoring," explains Andriy Tamoshyunas, tax consultant and partner of the consulting company ADA Group.

Another bad news is that the State Tax Service has got more powers to check the balances of risky goods in the virtual stock (goods in the "virtual stock" are calculated by the tax authorities in the context of the UKT ZED Ukrainian Commodity Coding System codes when assessing the degree of the taxpayer’s riskiness).

"If the tax service sees the excess of commodities sold over the balances, they block the tax invoices. And with these changes, the STS will check the balances of not only risky, but all goods. Therefore, even more invoices / ACs might be blocked", says Igor Yasko, managing partner of Winner law firm.

Refusal to accept data tables. The bad news for business is not over. Since 14 October, the State Tax Service has the full right to ignore the previously accepted data tables that have been submitted by the taxpayer. Besides, the automated system of VAT invoice registration may omit this table. However it is quite possible that the tax inspector will decide later to reject the data table. He has the following reasons for doing this:

• it was decided that the taxpayer falls under the risk criteria;
• the STS learned that the information indicated in the table by the taxpayer is not consistent with the types of economic activity within the State Classifier of Goods and Services (KVED), codes of goods according to UKT ZED or codes from the State Classifier of Products and Services (DKPP).

Simply put, if a taxpayer falls into the category of risky, the STS may reverse its decisions and refuse to accept the data tables.  Lawyers say that previously there was no such provision in the procedure for registration of VAT invoices.

New criteria for identifying risky transactions. Resolution No. 1154 has created another problem for business. . The point is that taxpayers will increasingly fall under the risk criteria.

• "rule ≥ 1.5" – the volume of supply of goods / services specified in the tax invoice submitted for registration is greater than or equal to the gap between the volume of purchase multiplied by 1.5 and the sale of this product / service. In other words, when the company sold more products than it had purchased;
• "table rule" – the submitted data table lacks the  respective codes of goods/services indicated in the VAT invoice;
• "> 50% rule" – prevailing (more than 50%) "risky" goods in the total balance of products (difference between purchased and sold volumes).

"As far as these areas of business are characterised by such a phenomenon as code deflection", when "input" (purchase) codes  do not correspond to the "output" (sale) codes of goods/services . At the same time, these are mainly taxpayers with a more than 10-year-history, with existing material and technical base, counterparties and more or less similar turnovers. But if earlier their invoices were registered without any problem, everything has changed today", Andriy Tamoshyunas comments.

What the business will have to be ready for. Experts believe that all these changes threaten with mass blocking of VAT invoices. This is somewhat reminiscent of the spring 2019 situation when the Cabinet of Ministers made it mandatory to monitor invoices submitted for registration not only by mid-size but also by small businesses. All this led to massive complaints from entrepreneurs who got into trouble with  the tax authorities.

"Sometimes it happens that an enterprise engaged in agricultural business also buys goods / services under the UKT ZED or KVED codes that may be identical to the codes that form the arranged tax credit. As a result, the entire VAT of such an enterprise will be blocked," Igor Yasko gives an example.

Unfortunately, attempts of the Cabinet of Ministers to "brush up on'' the SMKOR have not  succeeded yet. Therefore, VAT payers should be ready for blocking of invoices and that they will have to defend their rights before the tax authorities.