Imminent major change to VAT system will affect over 500,000 payers

The biggest changes in the value-added tax system since its introduction in the Czech Republic in 1993 will come into effect in two weeks’ time after the minister of finance, Andrej Babiš, succeeded in definitively pushing the move through on Tuesday.

Photo: Barbora KmentováPhoto: Barbora Kmentová Companies and the self-employed will have to supply the state with far more information than at present under the new rules, the newspaper Hospodářské noviny reported. One of them will require around 550,000 VAT payers to file their tax returns by February 25.

Tax returns may now only be submitted in electronic form, perhaps posing a challenge to the 150,000 small firms and individuals who filed theirs on paper this year.

Martin Diviš, an expert on indirect tax at consultants PwC, told Hospodářské noviny that electronic-only tax returns were a step in the right direction and a logical trend. Practically everybody has an internet connection today so it shouldn’t cause anybody any problems, he said.

The most attention-grabbing aspect of the new system is the fact that VAT payers will be required to send tax officials a regular overview of all invoices or other non-cash documents that they have received or issued in the previous month.

This change – going by the term “inspection reports” – will provide the state with a huge volume of sensitive data on all Czech companies. For instance, it will make clear which other businesses a particular firm is involved with.

Unusually for tax legislation, which tends to be pushed through at the last minute by Czech legislators, the “inspection reports” were rubberstamped a year in advance.

Hospodářské noviny writes that the requirement has been rather overshadowed by the debate surrounding electronic cash registers – despite the fact the former will have a greater impact on those in business.

The right-wing parties the Civic Democrats and TOP 09 have called for the change to be delayed for a further 12 months to allow people to prepare. They say also that it had been linked to a bill on electronic cash registers that was rejected.

However, according to the head of the Financial Administration, Martin Janeček, the measure has been in the law for a year. It is therefore untrue that the public were unable to prepare for it, he said.

Government officials say the new measure will prevent large-scale VAT fraud. Mr Janeček’s agency estimates that up to CZK 80 billion is unpaid every year.

The monthly filing of invoices will make the Financial Authority’s work easier and allow it to uncover fraud more effectively. Special software will look for discrepancies between issued and received invoices.

Some companies fear the leak of sensitive data. But Mr. Janeček told Hospodářské noviny says the information supplied will reveal no more than that company A has done a transaction with company B. The fact firms do business together is already quite publicly known, he argued.