NSS k casove a vecne souvislosti nakladu a vynosu u stavebnich praci

SAC on the temporal and material relationship between costs and revenues in construction work

In its judgment 1 Afs 39/2022, the Supreme Administrative Court ("SAC") considered a situation where a construction company ("the Company") claimed tax deductible costs on subcontracted construction works which, according to the tax administrator's findings, were related in time and substance to the following tax period.

In the tax year, the Company invoiced the supplies to its customer in accordance with the contract documentation and booked them to revenues. At the same time, it claimed costs on, inter alia, subcontracted works. However, during the tax audit, the tax administration found that the sub-deliveries were not made until subsequent periods and the expense was therefore not realised in the period of revenue recognition.

During the tax audit, the tax administration examined documents and information submitted by the Company, the subcontractors and the customer, such as:

• A key piece of evidence for the tax authority was the testimony of the subcontractor, who disputed the amount of the remuneration and the course of performance of the contract as described by the Company.
• It questioned the presence of the subcontractor at the work site, as the Company did not provide any record of this fact, only photographs, which the tax administrator examined in detail, including by using internet maps.
• On the basis of the invoices and inventories of the respective work in question, requested from the subcontractor and the customer, it identified that it was not clear from the documents what work was carried out, where, when, by whom and to what extent.

By its appeal, the Company objected to the procedure of the tax administrator, which should have violated the principle of proportionality by requiring it to provide evidence to prove the alleged facts beyond what it would be fair to require.

However, the SAC upheld the Regional Court's assessment: 'The law does not impose an obligation to "match" the works carried out by the subcontractor with the works invoiced by the taxpayer to its customers; it is, however, up to the taxpayer to choose the means of proof to prove its claim; if these do not correspond, it is logical that it will not bear the burden of proof in relation to the actual incurrence of the declared cost.'

The SAC concludes that the Company did not provide sufficient evidence to prove its tax claims and thus dispel the doubts of the tax administrator.The above is confirmed by the conclusions of the 30 Af 71/2021 judgment of the Regional Court in Brno in a similar case, which we informed you about in our May Tax and Legal News.

Temporal and factual nexus is assessed very strictly in the Czech tax environment. Thus, not only companies involved in construction and public procurement, often facing various demands from contracting authorities, must remain vigilant and carefully evaluate the timing of revenues and costs.

If you have any questions, please contact the authors of this article or the EY advisory team you work with.

Authors:

Hana Cicvárková

David Barczi

Vojtěch Bouřil