180,000 VAT invoices on the blacklist. Why can't businesses register them without any problems?
And how did the government once again change the mechanism for blocking invoices?
On 2 June, the Cabinet of Ministers one more time made amendments to the procedure for registering VAT invoices/adjustment calculations (TI/AC). This was announced by Danylo Hetmantsev, the Chairman of the Parliamentary Committee on Finance, Taxation, and Customs Policy. He stated that these changes would help reduce the percentage of blocked invoices and simplify administrative procedures for VAT payers.
Specifically, the government limited the powers of the State Tax Service regarding the categorization of taxpayers as high-risk and introduced automatic registration of blocked VAT invoices under certain conditions. However, there is an alternative viewpoint that the Monitoring System for Risk Assessment Criteria (SMKOR, designed for VAT monitoring) will now become even less business-friendly.
Mind has explored how the mechanism for blocking VAT invoices will function now.
How has the procedure for registering TI/AC changed? Since autumn 2022, the government has changed the procedure for registering VAT invoices twice. The first change occurred in October, after which the registration algorithm essentially 'broke down'. This was later acknowledged even by representatives of the tax committee of the Parliament.
As a result of the changes, the State Tax Service gained much more authority to verify already registered invoices. Additionally, many companies started experiencing blocking and so-called high-risk status, often without any valid reasons. As a result, the percentage of blocked invoices doubled from 0.8% to 1.69% of all invoices in November-December 2022.
Hetmantsev explained that there was a flood of complaints from companies that had never encountered VAT blocking before. Eventually, the registration procedure was revised, and the Cabinet of Ministers approved its new version, which came into effect on 11 January 2023. The main changes included the restoration of registration for all invoices blocked after 14 October 2022 in case of submitting the corresponding data table detailing their transactions by the taxpayer. Additionally, the government essentially exempted VAT invoices with amounts up to 5000 UAH from monitoring.
However, the issue of invoice blocking was not entirely resolved. In particular, consulting company Advanter conducted a survey among business representatives and found that more than 70% of companies had some degree of difficulty with VAT invoice registration at the end of 2022 and the beginning of 2023.
Finally, a new set of amendments was developed and approved by the Cabinet of Ministers in early June 2023. According to Oleg Hetman, the coordinator of expert groups at the Economic Expert Platform, experts, business representatives, the Ministry of Finance, the State Tax Service, and the relevant committee, all contributed to these amendments.
What's new in the VAT invoice registration mechanism now? Since the final version of the Cabinet's order has not been published yet, the following provisions provided by the Economic Expert Platform are given below. The main changes are as follows:
Let's clarify that the wording in the adopted resolution to be published by the government may vary. However, the essence remains the same.
As explained in the comment by Mind Oleg Hetman, thanks to the aforementioned changes, taxpayers will have more opportunities to defend their rights in disputes with the State Tax Service. "We also expect that the percentage of blocked invoices will decrease even further, from the current 0.8% to 0.5-0.6%," he commented.
According to Danylo Hetmantsev, the updated procedure for VAT invoice registration will significantly streamline the process for businesses to register TI/AC and provide taxpayers with a convenient tool for challenging decisions regarding their inclusion in the high-risk list. "In other words, taxpayers will be able to appeal such decisions to the State Tax Service using electronic services and receive results in electronic format," Hetmantsev explained.
Is there any criticism of the changes to the blocking procedure? Not everyone agrees that the issue of blocking VAT invoices will be a thing of the past. For example, Nina Yuzhanina, the former head of the parliamentary tax committee and MP of the European Solidarity party, has voiced strong criticism of the aforementioned amendments. "The proposed changes to Resolution No. 1165, disguised as improvements, continue the trend of increasing pressure on businesses," she believes.
Yuzhanina says, the updated procedure has the following drawbacks:
- restrictions on unconditional registration of TI/AC – now, only operations specified in the considered data table can be reflected in the registered invoices, provided that the taxpayer is not classified as high-risk;
- VAT payers will be held responsible for their counterparts – the decision to assign a high-risk status to a taxpayer will include the tax identification number of the counterpart and the date of their inclusion in the list of high-risk taxpayers, which violates the principles of individual legal responsibility in conducting economic operations;
- lack of an exhaustive list for lifting the blocking of VAT invoices – the version of the procedure approved by the Cabinet of Ministers allows taxpayers to submit any documents at their discretion;
- delegating authority to regional commissions to make decisions on unblocking VAT invoices – they will review applications from taxpayers instead of the commissions at the main tax offices in the provinces and Kyiv, which may affect the objectivity of decisions;
- the provision on automatic registration of TI/AC being ambiguous in case of exclusion of a taxpayer from the list of high-risk ones – it imposes significant restrictions related to the simultaneous fulfilment of certain conditions (to be specified by the Cabinet of Ministers), and it does not apply to all blocked TI/AC.
How many VAT invoices are being blocked? Statistics from the State Tax Service also show that the System for monitoring the compliance of tax invoices/adjustment calculations with risk assessment criteria requires further refinement. According to the tax authorities, the blocking rate over the past three months has essentially stagnated at around 0.8% of all invoices. Yes, it is half as much as in November 2022. But, according to experts, the optimal figure should be even lower – at around 0.3%.
SMKOR performance in May 2023
| Indicator | Value |
| Number of VAT payers as of 1.06.2023 | 241,000 |
| Number of TI/AC submitted for registration | 22.2 mln |
| Number of taxpayers whose TI/AC registration was suspended | 26 ,00 |
| Number of blocked TI/AC | 181,900 |
| Number of taxpayers who submitted a data table to the State Tax Service | 4900 |
| Number of tables approved by the tax authorities | 2800 |
| Number of taxpayers with risky status | 4700 |
Source: State Tax Service data
The parliamentary committee responsible for these matters has also released data on their handling of complaints received from VAT payers. From January to April, inclusive, the committee received 339 appeals. A significant portion of these appeals was related to the blocking of TI/AC invoices, the inclusion of taxpayers in the high-risk list, and the non-consideration of the data table. As a result of reviewing these appeals, over 2,590 tax invoices were registered, and the high-risk status was lifted from 22 entities.
How will the mechanism for registering IN/AC change in the future? Business representatives agree that the system for registering VAT invoices requires further improvement.
For example, the Ukrainian Business Council, which brings together over 100 business associations, insists that the SMKOR’s ideology needs to be changed with a focus on its analytical function by limiting the blocking time for tax invoices. Under this scenario, funds would be frozen for a certain period, and they would only be permanently blocked if proven violations by the VAT payer exist. They also propose introducing an independent body to handle appeals regarding blocking decisions, restricting the retroactive assignment of high-risk status, and even removing the concept of a "high-risk taxpayer" from the Cabinet of Ministers' regulatory framework. Additionally, they suggest establishing criteria for the effectiveness of the SMKOR, such as the ratio of suspended to registered invoices and the proportion of VAT payers whose TI/AC have been suspended.
Oleg Hetman, on his part, announced that another set of changes to the VAT invoice registration procedure is already being worked on. Among the proposals from the expert community are:
- introducing an additional indicator that characterises the positive history of the taxpayer and confirms the continuity of their activities;
- increasing the threshold for mandatory transition to VAT payment (estimated at around UAH 3 million), which would minimise the blocking of invoices for small businesses;
- regulating the procedure for obtaining certificates from the tax authorities that confirm a counterparty's non-high-risk status;
- improving the criteria for the initial blocking of VAT operations in general.
"We propose a total of 10 changes, which are essentially ready. Now it's up to the Ministry of Finance to describe and formalise them," clarifies Oleg Hetman.
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