Follow the Know Your Customer guidelines to avoid VAT risks in your business

As part of your legitimate business operations, you may unintentionally take part in fraudulent business activities where one of the operators in a transaction chain attempts to avoid value-added tax. All companies, whatever the size or line of business, face the risk of becoming involved in fraudulent activities. 

As a responsible entrepreneur, you are always obliged to check whether your business partners can be trusted. You are not liable for consequences if you have unintentionally taken part in fraudulent activities as part of your legitimate business operations. However, this requires that you have acted responsibly. Your responsibilities as an entrepreneur include making sure that your business partners are trustworthy.

See animation: Entrepreneur - Recognise VAT fraud (Youtube)

Consider these matters when buying something

Please note that any of the items below, relating to the Know Your Customer guidelines does not directly indicate that you are dealing with the shadow economy. However, if you notice that multiple characteristics are met, you have reason to suspect your business partner’s integrity in tax matters. Check your business partners’ background carefully, or decline from doing business with them if necessary, in order to avoid risks in your own activities.

1. You receive offers that seem too good to be true without asking for them.
2. The seller is a new, recently established or recently registered company with no financial or trading history.
3. The batches sold are large compared to the seller’s past business activities.
4. The company or its representative is not familiar with the product or the market.
5. The company’s contact person or people in charge do not change, but the company or its contact or bank account information change repeatedly.
6. The company does not change, but the contact person or people in charge change, and the price drops significantly at the same time.
7. The seller insists that even large amounts should be paid in cash.
8. You are asked to make the payment to a third party or into a foreign bank account.
9. You are asked to split your payment between several bank accounts.
10. Payment arrangements seem strange or suspicious.
11. The company is not in the VAT register despite its extensive business activities.

As a responsible operator of business, you should make it routine to consider the Know Your Customer principles whenever you need to evaluate the reliability of your business partners. 

If you notice something suspicious, notify the Tax Administration with the tax evasion report form. Your responsible enterprise stands to benefit when fraudulent operators are no longer allowed to compete in the same market as you. 

What if your company has become involved in fraudulent activities?

If you have not taken the required precautions, you may have to pay the missing VAT even if you did not intentionally participate in the other party’s fraudulent activities. This may happen even if you have not received any financial gain from the other party’s VAT fraud. 

If you are the buyer, you may lose the VAT deduction on your purchase. If you are the seller, your VAT-exempt sales may be regarded as VAT-liable.

The Tax Administration may contact a company that has had commercial contacts with parties that have breached the VAT legislation currently in force. We use this method to render assistance to companies in identifiying the more reliable partners to do business with. In addition, when contacting the companies we also inform them of the possible consequences of buying goods from parties that fail to comply with VAT rules.

See expert tips for avoiding VAT fraud:

Is your company involved in a VAT fraud? Identify fraudulent business operator (Youtube)