Entrepreneurs caught up in VAT carousel

Debt collection instead of prosecuting fraudsters: Controversial practices of KAS

As revealed by statements from the new head of KAS Marcin Łoboda[1], in recent years, customs and tax offices have adopted a questionable practice. In cases of tax fraud, authorities were primarily targeting areas where there was a real possibility of collecting public law receivables – some office directors even created special recommendations in this regard.

Roundup in VAT carousel: Absurd consequences of tax authority actions

In practice, this meant that all shell companies and fronts created for criminal purposes took a back seat. The tax authority was primarily concerned with entrepreneurs who had assets, essentially regardless of their role and awareness of participation in criminal activities. This illustrates how the pressure for results sometimes overshadows the consequences that authority actions have on ordinary citizens.

And these can be devastating. Often, random individuals are forcibly inserted into VAT carousels along with fronts from management boards of companies created solely for the purpose of tax fraud. The actions of authorities then resemble a roundup. Someone suddenly turns off the lights and law enforcement agencies sequentially charge every CEO whose company, even unintentionally, found itself in a fraud scheme. As a result, management personnel may face up to 25 years in prison.

What are VAT carousels?

Generally speaking, VAT carousel is a tax fraud scheme based on exploiting the mechanism of intra-Community supply of goods and taxation rules at 0% rate.

The purpose of such looped transactions is not to sell goods, but quite the opposite. The goal is for the same goods to be constantly sold. That is, to sell in such a way as not to sell. This is an important difference because goods in a carousel serve solely as a VAT tax carrier. In this way, the carousel spins with goods in order to generate an undue tax advantage – in the form of tax deduction or non-payment of tax. Although in fact there may be no goods at all.

How is this possible?

Well, often within carousel schemes, turnover exists only and exclusively on paper. That is, according to the principle paper accepts everything, there is no turnover at all. There is only assembly-line production of empty invoices.

A close relative of VAT carousel are so-called chain frauds. Their scheme is less complicated and is based not on looping supplies, but on a pillar which is the missing trader.

Is every VAT taxpayer a fraudster? Overzealousness of law enforcement agencies in a nutshell

Is it easy to get drawn into a VAT carousel? Very much so!

Is it easy to get out of it? Well, it turns out this is not a simple matter!

Often one encounters people who, at the suggestion of an acquaintance, through making contacts on the Internet, or at social-business meetings, established cooperation in the supply of goods.

And everything was going well, until the fateful day when a tax audit found irregularities, as a result of which a criminal-tax procedure was initiated. Or when, like a bolt from the blue, completely unexpectedly, gentlemen with three-letter acronyms on their jackets visited the residence of board members and the company’s headquarters.

What next?

Well, the aforementioned board members must listen to the services’ arguments.

On what basis can one end up in multi-month ‘temporary’ detention or lose one’s life savings? Below we present several examples of how absurd the argumentation used by law enforcement agencies can be, which are doing everything they can to attribute membership in a tax carousel, and often also in an entire organized criminal group dealing with VAT fraud.

• Example 1: business is not for small players, or the fateful share capital

Regarding a certain company, authorities determined that the entity could not actually conduct business activity. Why? Well, the share capital amounted to only several tens of thousands of zloty. According to the authority, the share capital did not allow for purchasing goods of significant value.

• Example 2: margin too low

Did you buy goods at a good price and think you found a bargain? Be careful with your own margin. Authorities often charge participation in a VAT fraud group when the margin added by the entrepreneur was too low in the prosecutor’s assessment. It’s even worse if several similar, unaware businessmen with low markups happened before you. You have no idea what the purchase price from the wholesaler was for your seller? For investigators, this doesn’t matter.

• Example 3: you must document transactions… but if you’re already doing it, it’s probably for show

The taxpayer, in accordance with legal requirements, verified the contractor’s VAT-EU number in VIES, collected documentation confirming the export of goods, and filed an appropriate declaration. Additionally, he received a statement from the buyer that the goods would not return to Poland, took photographs of the goods and loading, and even had his employees load the goods onto trailers. However, when a carousel scheme was detected, the taxpayer was assigned the role of a buffer, and the precautionary measures applied by the taxpayer were treated as maneuvers merely intended to simulate legal activity. Because as everyone knows, overzealousness is worse than… .

• Example 4: lack of a marble palace as headquarters

Although even the Ministry of Finance has stated that virtual offices cannot be treated as an automatic basis for refusing registration as an active VAT taxpayer, coworking spaces are still treated as suspicious. And so it happens that one of the key arguments in favor of participation in a tax carousel is using headquarters in virtual office and coworking spaces. Investigators raid the headquarters address, which turns out to be a virtual office, and on this basis draw far-reaching conclusions about the criminal nature of the activity – and they also treat contractors this way.

• Example 5: when time is pressing

Not only in the case of VAT carousels does it happen that authorities initiate preparatory proceedings to prevent the statute of limitations on tax obligations. Well, and once criminal proceedings are initiated, they cannot last indefinitely. In practice, there are cases when charges are brought without proper investigation of the case in order to maintain the validity of the investigation. This happens even when there is no tax decision yet(!).

What penalties can be imposed for participation in a VAT carousel?

Criminal charges will differ depending on what the specific scheme was supposed to involve and what role law enforcement agencies assign to the entrepreneur. It’s impossible to determine from above which crimes will be attributed in case of participation in a tax carousel.

It’s worth mentioning that in addition to criminal-tax offenses from the Criminal Tax Code such as art. 54, art. 55, art. 56, or art. 62, it may happen that charges from the Criminal Code will be brought for participation in a tax carousel. In such a case, criminal liability compared to criminal-tax liability grows exponentially and can reach up to 25 years in prison.

[1] Link to the statement of the head of KAS, Marcin Łoboda: https://www.rp.pl/podatki/art40614051-skarbowka-bedzie-lapac-juz-tylko-prawdziwych-oszustow