Armed tax officials in my home
"At 6:00 AM, armed officers from the Customs and Tax Office and KAS appeared at my home" – this is how one of my clients began his story during a tax consultation.
Andrzej, as we'll call him, has been running a company based in the UK for years. However, what seemed like a straightforward international business matter quickly became complicated when Polish tax authorities decided to investigate whether Andrzej had been properly accounting for his taxes.
He didn't pay taxes
It turned out that the tax office, which was supposed to help set up the company in the UK, actually operated from Poland and not only made an error in the registration process but also established a virtual address in England for Andrzej. Meanwhile, Andrzej never had an office there; he always operated from his home country. Despite formal registration in the UK, his company paid very low taxes there due to improperly managed accounting in that country. In Poland, however, he paid no taxes at all – neither personal, nor corporate, nor even ZUS contributions. This meant that despite his declared tax resident status in the UK, the company was not properly registered or monitored by the tax systems of either country.
Shouldn't the authorities be pursuing the advisors instead?
The dramatic intrusion of armed officers into Andrzej's home opens a more serious discussion about responsibility and ethics in business. This situation could indeed set a precedent regarding the unethical practices of accounting and tax firms. Despite unforeseen circumstances, it must not be forgotten that responsibility for unpaid tax liabilities always rests with the company owner. In this case, Andrzej, as a director, is accountable for selecting and hiring advisors, regardless of whether they operate in Poland or the UK.
The practices of some accounting firms, which choose easier paths to profit based on their clients' unawareness and the deceptions employed, lead to serious consequences. The unethical behavior of such firms can place their clients, like Andrzej, in an extremely difficult situation. It's hard to even imagine what a person feels when their home is suddenly filled with armed officers. It is undoubtedly a deeply stressful and unpleasant experience. The consequences of such events can radically impact a company's reputation and continued operation.
This critical situation serves as a warning, highlighting the importance of carefully verifying the competence and ethics of firms with whom we choose to collaborate. In this context, every entrepreneur should be aware that choosing an advisor is not just a matter of skill, but primarily one of trust and responsibility.
What did the tax audit involve?
Andrzej's case serves as a warning about the complexities and risks associated with conducting international business, especially when shadowed by non-compliance with tax and corporate law. The audit conducted in Andrzej's case was exceptionally thorough.
Investigators thoroughly checked the office locations of Andrzej, both in the UK and Poland. Synchronized inspections were carried out at accounting offices in both countries, demonstrating the extensive and meticulous nature of the operation.
During this intervention, Andrzej's wife managed to keep her computer, arguing that it was used solely for her professional purposes. However, other documents and data carriers were confiscated, which demonstrates the scale of the undertaking.
The investigators demonstrated significant knowledge of international tax law, pointing out irregularities in the company's structure based on international double taxation treaties.
Virtual office for your company
An analysis of legal documentation revealed that Andrzej had not visited the UK in the last two years, and the office address he provided turned out to be fictitious. The same tax office that assisted in setting up his company's structure was also involved in creating so-called shelf companies, which were then sold to other clients. This practice became so widespread that the office owner had already established over 100 such companies, a fact also revealed in court documents.
In light of the gathered evidence, including data from the UK company register (Companies House), investigators demonstrated that Andrzej's company was not operating in accordance with British law. After a thorough analysis of the situation, I unfortunately had to inform Andrzej that the current legal status left no room for doubt regarding the irregularities in his company's operations. Andrzej was in shock. He was unaware of how easily officials could verify his activities and pinpoint all irregularities with such precision.
How did officials uncover the irregularities?
In the context of the presented situation, a system called Common Reporting Standard (CRS) played a significant role. This mechanism facilitates the exchange of information between tax authorities of different countries, which is crucial for effective enforcement of tax law, especially in cases of suspected tax evasion.
In Andrzej's case, Polish officials used CRS to thoroughly analyze his financial transactions. They discovered that although the company was registered in the UK, no transactions were conducted through British accounts. Such actions indicated that most of the company's economic operations actually took place in Poland. Cooperation with the British Home Office additionally allowed them to establish that Andrzej had not been in the UK for the past two years, enabling them to determine his tax status as a resident of Poland, as this information confirmed that the center of the client's vital and economic interests was located in Poland. Consequently, the Polish tax office has every right to pursue him for any outstanding tax liabilities.
Additionally, it was revealed that the accounting and tax firm handling Andrzej's affairs might not have performed correct tax calculations, as evidenced by the data submitted to Companies House. This aspect also requires thorough analysis and potential corrections.
You're fighting a losing battle
I suggested to the client that he settle with the officials. I considered this the most reasonable strategy given his situation. As his advisor, I presented him with a detailed analysis of the applicable legal provisions and principles stemming from international agreements on the avoidance of double taxation. It is now clear that the accusations made by the tax authorities were justified and based on irrefutable evidence.
After thoroughly analyzing his situation, Andrzej decided to admit his mistakes and acknowledged that he only now understood that his business was not conducted in accordance with the law, despite doing everything his accountants suggested..
TaxOne's main goal is to support Andrzej in accurately calculating his tax liabilities, in accordance with the standards applicable in both the UK and Poland. By rectifying his accounting records, it will be possible to accurately determine the income generated in both countries, and thus correctly assess the tax dues. This approach will allow for a fair and lawful resolution to this complex situation, as the tax liability calculations made by the officials for Andrzej seemed significantly exaggerated to me.
Why it's not worth fighting the tax office?
In our discussions, I also covered other international cases which demonstrated that attempts to avoid taxation in the country of actual economic activity usually end in failure. Based on this, we decided that the best course of action is to admit fault and actively cooperate with the tax office. Through this approach, the client can expect lower penalties and reduced tax liabilities.
I also emphasized that resisting in this matter could have unfavorable outcomes for Andrzej due to a lack of strong legal grounds for defense. Nevertheless, we are considering legal action against the advisors who irresponsibly exploited his lack of knowledge, leading to an unwitting violation of tax regulations. Cooperation with officials and providing information about the unethical and illegal actions of his previous accountants can significantly mitigate potential legal consequences.
Therefore, my next steps will focus on supporting Andrzej in legalizing his business activities, both in Poland and the UK. Undertaking to regularize all formalities in accordance with legal provisions will enable Andrzej to conduct business without stress and away from the dishonest practices of previous accounting advisors.
