As a tax specialist I haven’t much believed those who promised that control reports will be easy to do, which is what the Ministry of Finance claimed in their campaign prior to the introduction of control reports. As a taxpayer or a tax advisor I cannot say whether control reports have had the desired effect for tax encashment, that must be assessed by others. However, I am able to evaluate to what extent has this been a burden to taxpayers – to our clients.  All of us knew that filling out the control report forms was going to be extra work but we couldn’t assess how much extra work exactly.  After more than a half a year of experience I must say it is not as bad as I thought it would be.

What is the extra work?

Until the end of 2015 only VAT returns had to be done and submitted, in specific cases also accompanied by recapitulative statements and extracts of records. The VAT taxpayer was also obliged to keep a detailed VAT record (records for the purposes of value added tax) but this did not have to be submitted to the tax office. Submitting it became mandatory only if the tax office made an official request (for example during a tax inspection or a process of elimination of doubts). Since 2016 the obligation to submit the extract of records has been cancelled and replaced by the control report which includes a lot of data and information including those that used to be stated in the extract of records.

While the information included in records for VAT purposes are basically the same as those in control reports forms, the latter requires the taxpayer to enter some additional data (such as invoice number which should be the same for the customer and the supplier, date of chargeability, chargeable event regime code etc.). During preparation of the control report there also must be made a distinction between whether the chargeable events amount to less or more than 10.000 CZK and weather its recipient makes the purchase for personal or business reasons. Disclosing this information was not required in records for VAT purposes. Thus it is not possible to automatically generate a control report from the data included in records for VAT purposes unless you add the above mentioned data and choose between the up to 10.000 CZK and over 10.000 CZK units. Besides, the control report format must be changed to .xml format and cross checked with the data in tax return forms. It follows that the preparation of the control report definitely is extra work. It would be hard to estimate how much extra work per client it is. With some clients it could be around 2-3 additional hours each month while with others, where the control report form is filled out manually, it could amount to days of additional work.

How it works in practice

For some clients, especially the smaller ones, the introduction of control reports means new problems and new work. Here are three cases of what we have come across in our practice.

First case: A joiner buys a power drill in a hobby store. He pays at the counter and leaves with a cash receipt without realizing that he should have asked for and invoice with his TIN. The joiner does his VAT returns quarterly. At the end of the quarter his accountant is preparing the quarterly  VAT return and control report and tells the joiner that she needs to work that receipt in but that it doesn’t have the necessary criteria, mainly the TIN. She sends him to the hobby store to ask for a proper document. If the hobby store obliges and issues a corrected invoice, they will not have to correct their VAT return but they will have to go back and correct the original control report plus submit a follow-up control report. I believe you can imagine that large stores will not be happy to oblige and put together a follow-up report every time a small entrepreneur or his or hers accountant asks them to do it.

Second case: Based on experience of the accounting section in our firm I would recommend all smaller firms to not choose the possibility of doing VAT returns quarterly. In such case those firms will find themselves in a situation where they do VAT returns quarterly but control returns monthly.

VAT returns and control reports are always based on the records and to fine-tune three control reports so that all the data is coincident with one VAT return form is for sure more work than preparing two more monthly VAT returns. The first case can also easily lead to a number of administrative mistakes which may result in a lengthy process of demonstrating the merits of the case to the tax authorities.

Third case: Another problem arises when we’re talking about a client from abroad who uses a foreign accounting program which cannot generate control reports automatically. Such systems are used in a whole group of firms. Because a change in the software would be of very large scale and very expensive, too, most firms decide to enter the data manually into an Excel table extracted from the accounting program. This means that after entering data into accounts, the accountant must go through invoices again and manually enter the date of chargeability, invoice number and possibly some other information into the Excel table; he or she must also choose between the up to or more than 10.000 CZK units.

Follow-up corrections of control reports

If a tax administration is notified by the specialized office in Pardubice about some discrepancies in control reports, they must ask both subjects (customer and supplier) to change, add or confirm entered data. We get this type of notifications almost regularly. It can’t be said that we are getting a notification every month but based on our experience there is a notification per client every two months.  We have seen cases where the tax administration contacts us over the phone (probably to so make it easier) to do the corrections much more often than they send out official notices. Often the problem is, as they say themselves, that “the Cave” (which is a nickname some clients have given to the Pardubice specialized office) hasn’t sent them all the necessary documents. Sometimes they will even ask us to send them an already submitted control report because unless they ask for it separately, they don’t have access to those documents. They may also ask for invoices and contracts which are then used to verify information entered in the control report.

Sanctions

You could not have missed the heated discussion in the media about sanctions for late or no submissions of control reports or for late reactions to notices from the tax administration. At the end of the month of July a new amendment was approved which provides both for periods and sanctions, however, the changes are very small – the five days period was changed to a five working days period. Our accountants see this change as positive because it allows them to take at least a week long holiday. The fact that lawmakers are reluctant to prolong this period can be understood if we consider that the period in which the tax administration has to return the excess VAT has not yet been prolonged.

Another frequent discussion topic was the sanctions implied by the law automatically. The amendment was adopted in this spirit: in case of one late control report submission in a year the taxpayer will be legally exempt from paying the 1.000 CZK fee. In all other cases (to recapitulate: 10.000 CZK for a late submission after receiving a notice from the tax administration, 30.000 CZK for not submitting despite receiving the notice, and 50.000 CZK for not submitting in the additional period) the tax administration can, under certain circumstances, lower the fee or exempt the taxpayer from paying it on the basis of a request made by the tax subject.

Last remarks

The control report brought with itself new obligations, more work and more expenses for the taxpayer. We may congratulate ourselves because we work only with the honest ones; during all those 6 months that have passed since the introduction of the control report we didn’t have a single case where a mistake found in the control report would call for additional taxation. But this is the way things are sometimes, that the honest ones must do something that is for them and the state purposeless only because of the dishonest ones.