HOW AN ENTREPRENEUR CAN REDUCE THE RISK OF VAT SURCHARGES

We are often asked how to properly assess the reliability of business partners to avoid “running into” VAT surcharges from the SRS. How can you protect your business from accidental cooperation with fraudulent firms?

It cannot be denied that some progress has finally been made by state institutions as well. For example, the SRS has currently developed a computerized reliability rating for companies, which each company can access for itself through the EDS. At least for now, you will not obtain such information about others.

Furthermore, as of January 1, 2018, the registration threshold in the SRS VAT payer register is set at 40,000 euros. This condition reduces the risk of fictitious companies registering as VAT payers—specifically, those that have no initial intention of conducting real economic activity and would later be used in VAT fraud schemes.

Therefore, the rescue of the drowning is still in their own hands, so every entrepreneur is encouraged to perform their own checks according to a checklist like this:

Research the Databases

When starting cooperation with a new business partner, verify their registration data against what was presented to you using at least public registers (www.vid.gov.lv, www.lursoft.lv, or www.firmas.lv; sankcijas.fid.gov.lv; google.lv; sudzibas.lv). Check the amount of taxes they have paid into the state budget, their number of employees, and the indicators from their submitted annual reports.

Often, suspicious firms only exist until the first audit. They submit their annual reports late or do not submit them at all.

Pay attention to the size of the share capital—although it is allowed to start a business with as little as 1 euro in capital, a large portion of questionable partners will have chosen exactly such minimal investments.

I wonder if this partner is still in the VAT register? You can check it here.

Visit Your Partner

Do not be shy about your desire to:
visit the new business partner at their legal address and/or office,
inspect their warehouse,
* ascertain the existence of their fixed assets with which they intend to provide services to you.

For example, if you order booklets—does the supplier have a printing machine and do they employ at least one person? At least themselves, if no one else.

It may happen that the partner’s office does not exist in reality—it is only a mailing address.

Talk to the official of the new cooperation partner, asking them perhaps uncomfortable questions such as:
“How will you act if the State Revenue Service summons you to provide explanations regarding this transaction? Will you be ready to provide them in person at Talejas iela 1, in the SRS premises?”

The answer will let you sense whether this will be a case of “I became a company official and signed the transaction source documents at the request of third parties, but I have not conducted any transactions,” where the SRS will not approve the right to deduct input VAT for any of the companies involved in subsequent deliveries. Yes, even for those who have not directly cooperated with the entrepreneur managed by this third party.

It is known that the SRS will not delve into or search for who these persons are that conduct economic activity in the name and for the benefit of a specific company, because these chain companies are usually not audited—after all, what can be collected from them!

Check Invoices Carefully

Pay very serious and in-depth attention to invoices or Transaction Source Documents.

Does the goods delivery invoice mention the carrier and their vehicle? Are all details accurate?

A real and comical example…
During an SRS audit, while reviewing goods purchase documents, it turned out that the goods issuer had made a mistake when indicating their address (Rīga, Brīvības iela 380) on the invoice. This longest street in Rīga is divided into 3 sections: Brīvības bulvāris, Brīvības iela, and Brīvības gatve. The building numbering in each subsequent section continues from the previous one. In the place where the building is assigned number 380, the street name is not “Brīvības iela,” but “Brīvības gatve”…

You might think that such errors can happen to anyone, but in the view of the SRS, this error on the invoice clearly proves that the invoice issuer is a fraudster if they do not even know their own legal address. Accordingly, it indicates the “formal preparation of transaction documents with the aim of unjustifiably using the right to deduct input VAT.” Meanwhile, the buyer, who truly did not know about this Brīvības iela numbering principle when receiving the invoice for the goods, now has to prove that the transaction mentioned in the invoice actually took place, despite the irrefutable conclusions of the SRS.

Foreign Investor or Fraudster?

Experience shows that in situations where a transaction occurs with a company whose board member is a citizen of Belarus, represented by a Latvian under a power of attorney, and whose bank account is in an Estonian credit institution, most often something will not be right, although theoretically such a situation is possible.

Similarly, the SRS will unequivocally consider a transaction fictitious where you, for example, receive goods from an Italian company (a VAT payer), but the transport service provider has indicated on the CMR that the goods were transported from Germany. In the view of the SRS, this is a blatant discrepancy between the invoices issued by the supplier and the documents issued by the transport service provider. Such goods, despite the fact that your company may have even resold them to customers, will be considered as not received from the supplier, and therefore it was not possible for you to sell them either.

Until recently, the fact that a business partner’s account was opened not in one of the Latvian credit institutions, but in Lithuania’s Paysera, or a credit institution in Poland, Hungary, or another country, seemed suspicious. Given the latest trend here of closing accounts along with banks, it might soon seem suspicious for a company to have an account in one of the Latvian banks…

In any case, we recommend building relationships with new partners gradually, just as banks do when issuing loans. Start with smaller orders and only increase volumes after evaluating the services received!

I hope this information was useful to you.

P.S. Next time, I will reveal 5 legal methods for you to save on corporate income tax. Follow the news on Messenger!