Dutch Court Upholds Extrapolated VAT Assessments Based on Hidden Records

Summary

The Amsterdam Court of Appeal found that handwritten shadow accounts, concealed cash and missing card receipts demonstrated substantially higher turnover than reported. Between 22% and 66% of gross sales at the relevant shops had allegedly been omitted, while one shop had EUR 82,472 of unrecorded card turnover. [vatupdate.com]
Because the businesses had not filed the required VAT returns correctly and lacked reliable cash and till records, the burden of proof was reversed and increased. The court accepted twelve assessments for January 2018 through February 2019 because the estimates were based on the taxpayers’ own records and returns. [vatupdate.com]
Cash-intensive retailers should preserve daily till data, card-payment reports, cash counts, stock records, purchases and handwritten records. These sources should reconcile with the general ledger and VAT returns. Undisclosed parallel administration can support turnover extrapolation, additional VAT assessments, evidential disadvantages and potentially separate penalties or fraud proceedings.

Extended article

The Amsterdam Court of Appeal has upheld Dutch VAT assessments based on concealed cash, incomplete accounting and a handwritten shadow ledger discovered during a customs inspection.

The records indicated that substantial portions of retail turnover had not been included in the businesses’ accounts or VAT returns.

According to the reported decision, between 22% and 66% of gross sales per shop had been omitted. One shop also had EUR 82,472 of card turnover that had not been recorded. [vatupdate.com]

Hidden and incomplete records

The dispute did not concern a minor bookkeeping difference. The inspection revealed a separate administration containing amounts materially higher than the turnover reported for VAT purposes.

The businesses also lacked:

complete cash administration;
retained cash-register data;
full card-payment records;
reliable stock information; and
a satisfactory explanation for the discrepancies.

The combination of positive evidence of additional sales and missing ordinary business records allowed the tax authority to challenge the accuracy and completeness of the VAT returns.

Reversal and increase of the burden of proof

Under Dutch procedural rules, serious defects in the return or administration can lead to reversal and increase of the burden of proof.

The taxpayer must then demonstrate convincingly that the assessment is incorrect. It is no longer sufficient merely to show that the authority’s calculation may contain uncertainty.

This does not give the tax authority an unrestricted right to choose any amount. Its estimate must still be reasonable.

Extrapolation of turnover

The tax authority used the available shadow records and filed returns to estimate undeclared sales for the affected periods.

Extrapolation may be accepted where direct records are incomplete, provided there is a rational relationship between:

the evidence discovered;
the periods assessed;
the type of business;
recorded and unrecorded sales; and
the resulting VAT calculation.

The court accepted twelve assessments covering January 2018 through February 2019 because the estimates were grounded in the businesses’ own records and VAT filings. [vatupdate.com]

Wider evidence base

VAT-control evidence extends beyond tax invoices and the general ledger.

For a cash-intensive retailer, the authority may compare:

till receipts;
daily till closures;
card-processor statements;
bank deposits;
cash counts;
purchasing records;
inventory movements;
wastage;
sales margins;
handwritten notes;
employee messages; and
VAT returns.

A discrepancy in one source may be explainable. Consistent omissions across several independent data sources are more likely to support an extrapolated assessment.

Recommended controls

Retailers should:

Retain detailed cash-register data.
Reconcile cash and card sales daily.
Investigate differences between till totals and bank receipts.
Maintain stock-movement and wastage records.
Prohibit unapproved parallel sales records.
Reconcile declared turnover to the general ledger.
Document legitimate non-sales cash movements.
Escalate unexplained variances.
Preserve records for the statutory retention period.

A Dutch VAT assessment normally requires prompt action. The standard objection period is generally six weeks from the date of the assessment. [twobirds.com], [belastingdienst.nl]

External sources and further reading