Unblocking Tax Invoices: Practical Advice and Common Mistakes

Ivan Maryniuk, Head of Tax Law Practice

Source: NV Business

Almost every VAT payer has faced blocking (stopping registration) of tax invoices, and this problem does not lose its relevance.

The blocking of tax invoices tarnishes an enterprise’s reputation with its counterparties, as they cannot receive tax credits, leading to working capital depletion. This situation also poses risks for the supplier, such as penalties from counterparties or non-payment. Suppliers are often forced to navigate cumbersome bureaucratic procedures to unblock tax credits, resulting in the inefficient use of time and labor resources. Let’s explore the reasons for blocking tax invoices and how to avoid these pitfalls.

Grounds for blocking tax invoices

The mechanism for blocking tax invoices is designed to combat VAT credit schemes and tax evasion. Blocking occurs when an enterprise sends a tax invoice for registration and checks the payer or transaction for compliance with the risk characteristics. The most common grounds for blocking tax invoices are disagreements in the nomenclature and quantity of purchased goods and services, as well as their delivery, sales of goods at inflated or understated prices, inclusion of the company in the category of risky taxpayers, and technical errors.

Unfortunately, blocking can affect not only fictitious entities but also legitimate businesses. To mitigate this, it’s crucial to review the enterprise’s business profile as a VAT payer, carefully select counterparties, and adequately prepare for the unblocking process.

Practical aspects of unblocking tax invoices

If your company is included in the category of risky VAT payers, this is a priority issue that needs to be addressed. After all, such a status is unconditionally acceptable for blocking all company tax invoices. In practice, the documents of risky VAT payers for unblocking tax invoices remain without positive consideration, and the tax authorities themselves insist on the priority withdrawal of the enterprise from the risk category. In such a situation and in the case of inaction, you can accumulate a significant number of tax invoices, which your accountant and lawyers will have to unblock for months.

Upon receiving a notification of a registration stoppage, it is important to analyze the reasons for the stoppage and begin thorough preparation of the required unblocking documentation.

The unblocking process includes preparation of:

• the message on unblocking tax invoices (the Message);
• written explanations to the message;
• documents related to the business transaction for which the tax invoice is blocked (in particular, contracts, acts, delivery/receipt invoices, transport documents, powers of attorney, warehouse documents, settlement documents, quality certificates and other documents confirming the information in the tax invoice (the indicative and non-exclusive list of documents is defined in the Order of the Ministry of Finance No. 520 of 12 December 2019).

In fact, the quality and completeness of written explanations and supporting documents are crucial, as the company is given only one chance to submit a complete set of documents. If the initial submission is incorrect or incomplete, the electronic system will not accept additional or revised submissions, significantly reducing the chances of successful unblocking.

Therefore, the following should be taken into account in the preparation for the business:

• written explanations to the Message should be clear, concise, structured and disclose information on the essence of the enterprise’s activity, its material and technical support, labor resources, financial position, business transactions for which the IU is blocked, as well as positive history of transactions with the counterparty or unblocking of the IU on similar transactions (if any);
• the block on the business transaction should include information on the legal basis and scope of the transaction, settlement status, movement of goods, participants of the transaction and their authorization, accounting of such transaction (each fact should be confirmed by documents).

Errors when unblocking tax invoices

The most common mistakes when unblocking tax invoices are:

• submission of an incomplete set of documents confirming the transaction or submission of documents that do not relate to such transaction;
• the submitted documents do not disclose the essence and scope of the transaction, as well as the procedure for forming the value of the transaction (although the tax authority should not analyze the transaction for its reality, but limited information, for example, in the act of acceptance-transfer of goods/services rendered on the content, scope and calculation) of the value of the transaction may lead to negative consequences, therefore, the acts should be detailed);
• failure to respond to the tax authorities’ enquiry regarding the need to submit additional documents to unblock the taxpayer’s tax (the company has 5 working days to respond to such a request, it is necessary to check incoming correspondence in the Electronic Cabinet of the taxpayer);
• improper reporting (e.g., the company did not submit a report in Form 20-OPP on the objects of taxation or did not reflect in the reporting the fixed assets used in the business transaction);
• the documents contain inconsistent data, the contract term has expired but the transactions are still in progress, mandatory fields of the transaction documents contain omissions.

Deadlines for unblocking tax invoices

Enterprises have 365 days to submit the required documents for unblocking tax invoices. The controlling authority reviews the submission within five working days.

If registration is denied, the decision can be appealed administratively within 10 working days of receipt (the appeal review period is typically ten calendar days) or judicially within one month if administrative appeal procedures are used, or within six months without prior administrative appeal.

Court rulings on unblocking cases are generally favorable, but the process can be prolonged, often taking 1.5 to three years.

Preventive measures for blocking tax invoices

To prevent VAT invoice blocking, it is advisable, inter alia:

• to file a VAT payer’s table (containing a list of codes for goods and services purchased and sold by the company on a regular basis) and written explanations to it (especially important when the company purchases some goods, processes them and sells others, i.e. there is a change of goods codes for input and output VAT);
• to check your counterparties against open sources of information on their activities, as well as requesting access to information on them in the Electronic Cabinet (can minimize the risk of being included in the category of risky VAT payers, and also help to reduce penalties during tax audits);
• to improve the business profile of a VAT payer – to have a sufficient number of employees with appropriate positions and differentiated salaries depending on the type of activity of the enterprise, to have a material and technical base and to reflect information about the latter in the reporting (do not forget to submit reports on the form 20-OPP);
• not to use mass registration addresses and mass directors;
• to treat primary documents and document flow in good faith;
• not to enter into atypical transactions that are not inherent to the business (especially for significant amounts).

Addressing the above issues proactively can mitigate tax risks and improve business operations. Blocking of tax invoices should serve as a warning sign that enterprise business processes may require refinement and management intervention.