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Small Business Taxpayers (KATA) and employment audit
Up to now thousands of taxpayers opted for paying tax under the KATA tax regime. They, together with employers employing employees with such kata work contracts can expect to face intensified audits in 2020.
Due to its simplicity and financial conditions, KATA tax regime became increasingly popular, therefore the Hungarian Tax Authority (NAV) will pay special attention to auditing taxpayers intending to circumvent the reporting of employees by opting for KATA tax regime and accepting invoices from them. The objective is to prevent such schemes that are designed to avoid the need to pay contributions.
NAV may impose harsh penalties primarily on employers but also on KATA taxpayers who are employed wrongly (i.e. by not a work contract).
Do you also employ KATA taxpayers? If yes, then be prepared for NAV tax audits!
Although it is not necessary to completely surrender currently applied subcontractor, supplier and agent structures, it makes good sense to conduct a due diligence into the existing system of contracts to make sure it can stand the test of NAV tax audits.
The most typical problem of the KATA is hidden employment. At the time of introducing KATA, the legislator was already aware of this risk as employment is assumed in cases where the principal effects payments to the KATA taxpayer up to at least HUF 1 million per year. With this assumption, however, the legislator failed to close the loophole. Although the 7 criteria (of which the taxpayer must meet two) for the application of KATA are well known, in addition to them the tax authority has multiple tools and points of reference that, based on the analyses of data, can highlight problems in case of certain taxpayers.
What kind of risk employers taking with employment of small business taxpayers?
In case an existing legal relationship is reclassified as employment, in addition to the kata taxpayers, the risk of a possible reclassification by the tax authority has a negative impact primarily on the employers accepting such invoices.
If regarding a company accepting invoices from Hungarian KATA taxpayer(s),NAV concludes that this is hidden employment, tax shortages arising from such reclassification would affect, in the course of a tax audit, the company employing KATA taxpayers and these tax shortages would include:
- The individual / social security contribution burdens of the specific employees,
- the social and vocational training contributions imposed on the paying agent,
- and also the sanctions associated with the personal income tax difference arising on the part of the kata taxpayer.
Except for personal income tax that was not paid, everything else must be paid by the employer. Moreover, in case it is possible to prove that tax evasion was intentional (false self-employment),the employer can expect a 200 percent tax penalty.
In order to filter, detect, and minimise the above risks, it is strongly recommended to scrutinize KATA structures and make sure they are in line with legislation. Our expert consultants gained hands-on experiences at the tax authority in reviewing contractual structures and background documentation from tax authority audit perspectives and they are willing to help with any questions you may have.
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