Every business owner is required to maintain accounting books and receipts from the first day of operating the business. Bookkeeping depends on the type of business, its scope, and the industry in which it operates.
The VAT and Income Tax account book management instructions are complex, cumbersome, and not easy to implement. These instructions relate to the obligation of every businessperson/taxpayer to manage the account books in his business, according to his occupation, field of business activity, and the industry to which he is associated, while describing the documents that a business owner must keep and document, as well as the manner in which the business’s account management will be carried out.
The ledger management file contains rigid instructions written “under laboratory conditions” and their implementation is sometimes difficult and complex 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, as well as in Section 130 of the Income Tax Ordinance (New Version), 5721-1961.
The manner in which a business’s account books must be managed is detailed in the Income Tax (Management of Account Books) Regulations, 5733-1973, as well as in the Value Added Tax (Management of Account Books) Regulations, 5736-1976.
Disqualification of accounting books only when there is a material deviation
As mentioned, the provisions of the Income Tax VAT accounting books are not easy to implement; in fact, meeting the requirements of all the rules for maintaining accounting books without exception is almost an impossible task for most business owners.
Interpretation and technical expert treatment of business accounting often leads to the rapid disqualification of business accounting books due to these and other deviations from the provisions set forth in the rules. The method of invalidating the books should not be considered as an easy basis for imposing a tax according to the best judgment on the income of the trader, even in the courts, as was recently ruled. In the case of 4779/09 Subhi Shaaban , They are not in a hurry to adopt the Tax Authority’s rulings regarding the invalidation of accounting books. Furthermore, it appears that the committees for the acceptance of books, which discuss appeals from traders/taxpayers regarding the decision to invalidate books, have adopted and are adopting the principle that invalidation of accounting books should not be easily permitted, even when there are significant deviations from the established rules. 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 disqualify books in a technical and non-substantive manner will be considered a deliberate disqualification whose sole purpose is to shift the burden of proof to the appellant , where the committee disagreed with the VAT Director that this was a “Sisyphean” task in order to arrive at the appellant’s true income. In her opinion, as long as there is an alternative way to access all of the business’s activity data, there is no reason to take the difficult and extreme path of invalidating its entire accounting books.
The result of the desire to create uniformity and accuracy in the management of business 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 business accounts 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 a way to invalidate books as a relatively easy basis for imposing a tax based on best judgment on business income.
It is important to note that in the event that the VAT administrator or tax assessor has decided 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 an assessment should be imposed on him according to the best of his judgment.
A material deviation in the management of the account 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 the business activity in order to reach a true tax result.
Sanctions for disqualification of books/failure to maintain ledgers
Under the Value Added Tax Law, the director may impose a fine on the dealer of 1% of all his transactions. This fine may reach considerable amounts depending on the dealer’s transaction turnover.
The Income Tax Ordinance stipulates very onerous sanctions for a taxpayer whose records are determined to be unacceptable or for maintaining records not in accordance with the instructions. 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 book disqualification process 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.
