The prevailing rule is that when a party to a transaction commits a fraud or abuses VAT regulations, the right of other businesses to deduct VAT cannot be challenged if they were unaware of the fraud or abuse and could not have become aware of the offences even if they exercised “due care”. That said, disputes with the tax authorities abound – especially in recent times − as to how “due diligence” is to be construed and how the exercise of due care by honest taxpayers is to be demonstrated in practice.
The Ministry of Finance has now come to the rescue of taxpayers with the publication of its Methodology of Assessment of Due Diligence on the Part of Goods Purchasers in Domestic Transactions [Metodyka w zakresie oceny dochowania należytej staranności przez nabywców towarów w transakcjach krajowych]. This is a non-legally binding guide by the Ministry of Finance addressed to its subordinate tax authorities, setting out the formal and transaction-related criteria which, as the Ministry believes, ought to be applied by taxpayers in their reviews of their present and future business partners in a bid to minimize the risk of their VAT deductions in transactions for the purchase of goods being challenged. Although the taxpayer’s rights to deduct VAT will not be entirely safeguarded even if it adheres to all the rules laid down in the “Methodology”, it will nevertheless be on much firmer ground in disputes with the tax authorities.
All undertakings purchasing large volumes of goods, especially in the manufacturing and trade sectors, are therefore well advised to go over the Methodology carefully and consider implementing the rules described there or adapting their internal procedures to comply with them. Significant changes may be called for, especially as regards vetting new business partners which is subject to closer and more elaborate scrutiny by tax authorities. The Methodology also has important things to say to taxpayers contemplating the split payment method, the use of which will imply (with certain exceptions and subject to restrictions) a general presumption that the taxpayer concerned exercised due care. The Ministry’s publication may also be a source of powerful arguments for taxpayers being audited or subject to tax proceedings on suspicion of illegitimate VAT deduction in the light of fraud or law abuse charges levelled against their business partners or other entities.