Preparing for a Tax Audit – Good Advice Can Help Avoid Costly Tax Disputes in Advance
Practically all companies, regardless of industry or turnover, can be subject to a tax audit. A tax audit examines whether the company has provided the Tax Administration with accurate and sufficient information about its operations. During the audit, the client also receives plenty of advice and guidance. However, audits often lead to tax assessments and disputes, which can sometimes last for years.
Costly tax disputes and additional tax assessments can often be avoided with good advice in advance. Tax assessments frequently relate to the same or similar types of situations, so paying attention early on to the most common errors helps prevent later tax demands.
Typical issues that arise in tax audits include, for example:
- Private expenses belonging to the company owner that have been deducted in the company’s accounting
- Transactions between the company and its owners or employees, and their pricing
- Work compensation paid to subcontractors not registered in the prepayment register
- Questions regarding which expenses can be deducted as annual expenses and which costs must be capitalized and depreciated over several years
- International tax matters, including the determination of whether an individual is a resident taxpayer (unlimited tax liability) or a non-resident taxpayer (limited tax liability) in Finland
- Impairment losses recognized in the company’s accounting records
- Various errors related to value-added tax (VAT) compliance
For example, tax audits often address something as common as VAT deductions related to vechiles owned by the company.
At the end of last year, the Supreme Administrative Court issued a decision (KHO 20.11.2020 / 4250) that highlights the challenges related to VAT treatment of passenger cars and vans.
In a recent decision, the Supreme Administrative Court addressed the complexities of VAT deductions related to passenger cars and vans. The case concerned Company A, which operated in the electricity transmission sector and maintained a fleet of vehicles registered as passenger cars and vans for use in fault response operations.
The restriction set out in 114 § of the Value Added Tax Act provides that even minimal private use of a passenger car disqualifies the company from making any VAT deduction related to that vehicle. In contrast, under 117 §, VAT on costs related to vans may be deducted, but only to the extent that the vehicle is used for purposes that entitle the company to a deduction.
The Supreme Administrative Court held that to the extent the vehicles were used for employees’ private trips during on-call hours, they were not considered to be used for VAT-deductible purposes. Consequently, the company was not entitled to deduct any VAT related to the acquisition and use of the passenger cars, nor the VAT on costs related to the vans to the extent the vans were used for employees’ private trips.
VAT deductions for passenger cars were completely denied due to even minimal private use during on-call hours, and VAT deductions for vans were denied proportionally to the extent of private use. Even minor private use of passenger cars fully disqualifies the company from claiming VAT deductions on those vehicles. Such issues are often identified during tax audits, which can result in significant additional tax liabilities for companies. Therefore, the best practice is to establish clear rules for vehicle use at the time of acquisition to avoid costly reassessments later.
The Finnish tax system is complex and keeping up with constantly changing legal and tax practices can be challenging. Fortunately business owners and entrepreneurs do not have to navigate taxation alone as there are skilled accountants auditors and lawyers available to support them. By addressing issues proactively the most serious pitfalls can often be avoided.
When you receive a call from the tax authority notifying you of an upcoming tax audit at your company, it is wise to contact your advisors and begin preparing for the inspection without delay. During the interaction between the tax auditor and the taxpayer, the taxpayer often finds themselves at a disadvantage. For this reason, professional assistance is essential when facing a tax audit.
The author has worked for several years as a tax auditor and subsequently for over a decade as a tax attorney.
