Every dealer is required to administer account books and receipts, from the very first day on which he opened his business. The administration of the account books depends on the nature of the business, its size and the activity in which it deals.
The instructions for administering V.A.T. and income tax account books are complex, cumbersome and not easy to implement. These instructions relate to the duty of every dealer and/or assessee to administer account books in his business, according to his occupation, his line of business and the branch to which he belongs. The instructions describe the documents that a business owner must keep and document, and also the manner in which the business’s accounts will be managed.
The compendium of administering account books contains rigid instructions that were written “under laboratory conditions”, and sometimes it is difficult and complex to implement them in the face of the business reality that is frequently changing and creates a new equilibrium in accordance with the market forces that operate in the business reality.
The normative framework
A business’s and/or assessee’s obligation to administer account books for his business is specified in detail in Article 66 of the V.A.T. Law, 5736 – 1975, and also in Article 130 of the Income Tax Ordinance (New Version), 5721 – 1961.
Thje manner in which a business’s account books must be administered is specified in the Income Tax Instructions (Administration of Account Books), 5733 – 1973 and also in the V.A.T Regulations (Administration of Account Books), 5736 – 1976.
The disqualification of account books only in cases of fundamental deviation
As stated above, the instructions for V.A.T. and income tax account books are not easy to implement; in fact, meeting the requirements of all the rules for administering account books, without exception, is an almost impossible task for most business owners.
Pedantically technical interpretation of, and reference to, the administration of a business’s account books can often bring about the speedy disqualification of a business’s account books owing to all sorts of deviations from the provisions set forth in the rules. The manner of disqualifying the account books should not be considered as an easy basis for bringing about the imposition of an assessment on the company’s revenue, according to best judgment assessment. What is more, the courts, as determined, recently, in Civil Appeal 4779/09 Subhi Shaban, are in no hurry to adopt the Tax Authority’s assertions regarding the disqualification of account books. Moreover, it looks as if the commissions on the acceptability of account books, that hold their discussions in the absence of the dealers, and/or assessees, about the decision to disqualify books, have adopted and currently continue to adopt the principle that the disqualification of account books should not be easily permitted, even when there are considerable deviations from the established rules, as long as it is possible to understand the business’s commercial activity in alternative, reasonable ways.
In the matter of Maklada Salah (Appeal 4/11) the Commission for the Administration of Account books, in Haifa, determined that it is the wish of the V.A.T. Director to disqualify account books for technical and not significant reasons, will be considered as a goal-orientated disqualification, the whole aim of which is to transfer the burden of evidence to the appellant. The commission did not agree with the Director of V.A.T. that it was Sisyphean work to reach the appellant’s real income. In the opinion of the commission, as long as there is an alternative way to arrive at all the business’s activity data, there is no reason to take the extreme, hard method of disqualifying his account books in their entirety.
The result of the desire to uniformity and pedantry in the administration of business’s account books, which is a legitimate desire in its own right, from the point of view of the Israel Tax Authority, which represents the State, and sometimes leads to the disqualification of business’s account books very quickly, because of some sort of deviation from the provisions set out in the rules.
In recent years, it seems that the Tax Authority, through the V.A.T. directors or Assessment Clerks, has found a way of disqualifying the account books as a relatively easy basis for bringing about the imposition of a best judgment assessment on business’s revenue.
It is important to point out that in the event that the V.A.T. Director of the Assessment Clerk decides to disqualify the account books, the dealer / assessee faces great difficulties in which the burden of proof is especially difficult to show that, despite the disqualification of the business’s Account books, there is no place for determining to impose best judgment assessment.
A significant deviation in the administration of account books is a deviation that might interfere with the course of the audit, so that the auditor or the inspector cannot find an alternative audit trail and cannot trace his business activity in order to reach a true tax result.
Sanctions due to the disqualification of account books and/or the failure to administer account books
In the Value Added Tax Law, the Director is entitled to impose a fine of 1% of a dealer’s total transactions. Such a fine might reach considerable sums, according to the dealer’s transaction turnover.
In the Income Tax Ordinance, determined very onerous sanctions on an assessee whose account books were determined to be unacceptable, or because of the administration of account books not in accordance with the provisions. Below is a list of some of the sanctions:
- Restriction of deductions and offsets – this means not permitting expenses submitted by the assessee.
- Abolishment of the first tax grades, and the imposition of a tax rate of 30% from the very first shekel.
- Delay of tax refunds
- Increasing the rate of tax deducted at source.
- Indictment – criminal offense.
In conclusion, the disqualification of account books is a very severe sanction which the Tax Authority should only take in extreme instances.
Professional legal counseling in the early stages of a process might inevitably turn into a game-changer. Holding intensive discussions with the V.A.T. Director or the Assessment Clerk, while raising arguments and concrete reasoning, with relevant references, might, necessarily, cancel the decree.
