Every business is required to manage accounting books and receipts from the first day of operating the business. Managing the books depends on the type of business, its scope and the industry in which it operates. The VAT and Income Tax accounting book management instructions are complex, cumbersome and not easy to implement. These are instructions that relate to the obligation of every business / taxpayer to manage the accounting books in their business, according to their occupation, field of business activity and the industry to which they are associated, while describing the documents that a business owner must keep and document, as well as regarding the manner in which the accounting will be carried out in the business. The book management file contains rigid instructions that were written “under laboratory conditions” and are sometimes difficult and complex to implement in the face of the business reality that changes frequently and creates a new equilibrium in accordance with the market forces operating in the business reality.
The normative framework
The obligation to maintain account books by a dealer/taxpayer is found in Section 66 of the Value Added Tax Law, 5736-1975, and in Section 130 of the Income Tax Ordinance (New Version), 5721-1961. The manner in which a business’s account books must be maintained is detailed in the Income Tax (Management of Account Books) Regulations, 5733-1973, and in the Value Added Tax (Management of Account Books) Regulations, 5736-1976.
Disqualification of accounting books only when there is a material deviation
As stated, the provisions of the VAT and Income Tax accounting books are not easy to implement. In fact, meeting the requirements of all the rules for managing accounting books without exception is almost an impossible task for most business owners. Interpreting and referring to the technical details of managing business accounts often leads to the invalidation of business accounting books very quickly due to these and other deviations from the provisions set forth in the rules. The method of invalidating the books should not be considered an easy basis for imposing a tax according to the best judgment on the income of the dealer, although the courts, as recently ruled in Case No. 4779/09 Subhi Sha’ban , are not in a hurry to adopt the Tax Authority’s rulings regarding the invalidation of accounting books. It also seems that the committees for the acceptance of books that hear appeals from dealers/taxpayers about the decision to invalidate books have adopted and are adopting the principle that the invalidation of accounting books should not be easily permitted, even when there are significant deviations from the rules. determined,
As long as the business’s business activities can be maintained in reasonable alternative ways.
In the matter of Makleda Salah (Appeal 4/11), the Haifa Book Management Committee determined that the VAT Director’s desire to invalidate books in a technical and non-substantive manner will be considered a deliberate invalidation whose sole purpose is to shift the burden of proof to the appellant . The Committee did not agree with the VAT Director that this is a “Sisyphean” task in order to arrive at the appellant’s true income. In its opinion, as long as there is an alternative way to reach all of the business’s activity data, there is no reason to take the difficult and extreme path of invalidating its books in their entirety. The result of the desire to create uniformity and accuracy in the management of businesses’ accounts, which is a legitimate desire in itself from the perspective of the Israel Tax Authority, which represents the state, often leads to the invalidation of businesses’ books very quickly due to these and other deviations from the provisions set forth in the rules. In recent years, it appears that the Tax Authority, through VAT administrators or assessment officials, has found the method of invalidating books as a relatively easy basis for imposing a best-in-class assessment on business income. It is important to note that in the event that the VAT administrator or assessment official decides to invalidate books, the trader/taxpayer faces a great difficulty in which the burden of proof is particularly difficult to show that despite the invalidation of the business’s accounting books, there is no basis for determining that it should be assessed according to best-in-class assessment. A material deviation in the management of the accounting books is a deviation that may interfere with the audit process, so that the auditor or supervisor cannot find an alternative audit path and cannot trace its business activity in order to arrive at a true tax result.
Sanctions for disqualification of books/failure to maintain ledgers
In the Value Added Tax Law, the Director may impose a fine on the trader at a rate of 1% of the total of all his transactions, this fine may reach considerable amounts depending on the trader’s transaction turnover. The Income Tax Ordinance stipulates very onerous sanctions on a taxpayer whose books are determined to be unacceptable or for maintaining books not in accordance with the provisions, below are some of the sanctions:
- Limitation of deductions and offsets – refers to disallowing expenses submitted by the taxpayer.
- Abolishing the first tax brackets and setting a tax rate of 30% of the first shekel.
- Delay in tax refunds.
- Increasing the withholding tax rate
- Filing an indictment – a criminal offense
In conclusion, invalidating accounting books is a very severe sanction that the Tax Authority should only resort to in extreme cases.
Professional legal advice in the early stages of the procedure may inevitably change the picture . Holding vigorous discussions with the VAT director or the tax assessor, while presenting real arguments and reasons with relevant references, may inevitably cancel the ruling.
