Disputing VAT Assessments and Denied Input Tax Credit in Ukraine

Have you received a tax audit report (akt perevirky) in which the State Tax Service of Ukraine (Derzhavna podatkova sluzhba, DPS) has denied your input VAT credit and assessed additional liabilities together with a penalty and late-payment interest? This is not a verdict — it is a calculation, and a calculation can be checked figure by figure. As a forensic economic expert, I will explain what the tax authority relies on, the conditions under which the right to credit survives, and how documents and an expert examination can disprove the assessment.

How a VAT assessment is tied to the removal of tax credit

The mechanics are almost always identical. Following a documentary audit, the DPS draws up an act in which it declares part of your transactions “unreal” or “unconfirmed.” The consequence is that the authority does not recognise (removes) the input VAT credit on those transactions. A smaller credit means a larger amount payable, and it is precisely this difference that becomes the assessed VAT liability, recorded in a tax notification-decision (podatkove povidomlennia-rishennia, PPR). On top of it, a penalty and late-payment interest are charged.

It is important to see the chain of dependencies here. A single qualification — “the transaction is unreal” — drags with it the removal of credit, the assessment, the penalty and the interest, because all of these figures are derivative. That is why disproving the underlying ground usually collapses the entire construction of the PPR, not just one isolated number. This is the essential difference from the everyday assumption that “if they assessed it, you have to pay.”

Three typical grounds the tax authority relies on

Unreal (goods-less) transactions

The most common allegation: the documents were drawn up, but there was supposedly no real movement of goods or services. The authority claims the transaction exists “only on paper” and therefore gives rise to no right to credit.

Defective counterparty

The supplier is declared “problematic”: it lacks sufficient resources, staff, warehouses or transport, files no reporting, is registered at a “mass” address, or features in criminal proceedings (such tax-evasion cases are now investigated by the Bureau of Economic Security, BEB). From this the authority concludes that the supplier could not have delivered the goods.

Break in the supply chain

Within the electronic VAT administration system, the authority sees that somewhere along the supply chain the figures did not “reconcile” — a so-called break (rozryv). The consequences of that break are frequently shifted onto the final buyer, who has nothing to do with the violations of a “transit” company.

In practice these three grounds are often combined in one act. But each of them is an assumption that must be proven by examining your specific transaction, not the status of your partner.

Two conditions for the right to tax credit

The law states the right to credit clearly. Under Article 198 of the Tax Code of Ukraine (Podatkovyi kodeks, PKU), it arises only when two conditions are met simultaneously:

1. A timely registered tax invoice. Paragraph 198.6 of the PKU prohibits including in the credit any amounts not confirmed by tax invoices registered in the Unified Register of Tax Invoices (Yedynyi reyestr podatkovykh nakladnykh, YeRPN). Article 201 sets the procedure and deadlines for registration.
2. Proper primary documents confirming a real transaction. Article 44 of the PKU requires reporting figures to be supported by primary documents and accounting registers, while Article 9 of the Law “On Accounting and Financial Reporting in Ukraine” sets the mandatory details of such a document.

Condition	Legal basis	What is checked
Registration of the invoice in YeRPN	Art. 198.6, 201 PKU	fact and timeliness of registration
Primary documents	Art. 44 PKU, Art. 9 Accounting Law	reality and proper execution of the transaction

The key point: both conditions must be satisfied together. Flawless primary documents without a registered invoice give no credit, just as a registered invoice without a real movement of assets gives none either. It is at this junction that the dispute most often unfolds.

Penalties under Article 123 of the PKU and late-payment interest

When the authority independently determines the understated liability, it applies a penalty under Article 123 of the PKU. In the current wording, the size of the penalty depends on whether intent is present:

• as a general rule — 10% of the assessed liability;
• if the authority proves the taxpayer acted wilfully — 25%;
• for repeated wilful acts within 1,095 days — 50%.

Intent is a separate matter of proof, and the burden of establishing it lies with the tax authority. In practice, inspectors often apply the higher rates formally, without properly substantiating intent — and that is an independent ground for dispute. Late-payment interest is charged under the rules of Article 129 of the PKU. Since both the penalty and the interest are calculated from the amount of the principal liability, an error in the underlying calculation automatically makes these charges wrong as well.

Connection with blocked tax invoices and “riskiness” status

An assessment often grows even earlier, at the stage of blocking tax invoices. The registration of an invoice may be suspended under the Procedure approved by the Cabinet of Ministers (Resolution No. 1165) if the transaction meets the riskiness criteria. Separately, a taxpayer may be entered into the list of risky payers under defined criteria — and then all of its invoices are blocked.

The logic of the consequences is as follows: if your invoice is blocked and unregistered, your buyer receives no right to credit; if your supplier’s invoice is blocked, you receive none. An unregistered invoice today easily turns into an assessment tomorrow. That is why riskiness status and the unblocking of invoices are not a separate technical nuisance but part of the very same dispute over the right to credit. Decisions of the commission on riskiness and on refusal to register an invoice are also subject to appeal.

What the Supreme Court says

The settled practice of the Cassation Administrative Court within the Supreme Court, available in the Unified State Register of Court Decisions (YeDRSR), consistently protects the right to credit for real transactions. In general terms, the court proceeds from the following:

• the taxpayer is not responsible for the tax discipline of its counterparties and is not obliged to monitor their reporting;
• a “break” in the VAT chain, or tax information about a partner, is not in itself unconditional proof of unreality;
• a criminal verdict against a counterparty’s official, adopted without examining your specific transactions, has no predetermined force;
• a conclusion of unreality must be based on examining your particular transaction and its documentary support.

This rests on the principle of the individual character of legal liability (Article 61 of the Constitution) and on the rule of administrative procedure whereby the duty to prove the lawfulness of a decision lies with the public authority (part two of Article 77 of the Code of Administrative Procedure, KAS) — that is, with the DPS. At the same time, this is no blanket indulgence: if the authority proves that no goods moved anywhere and the supplier physically could not have delivered them, the right to credit is genuinely lost. The essence of a defence is therefore to affirmatively prove reality, not merely to criticise the authority’s position.

The role of forensic economic expertise

A tax dispute is above all a dispute about numbers, and verifying them requires specialised knowledge. This is where the forensic economic expert works. Such examinations are governed by the Law of Ukraine “On Forensic Expert Activity” and the Instruction on assigning and conducting forensic examinations, approved by Order No. 53/5 of the Ministry of Justice (Miniust); the list of expert specialities is also set by the Ministry. In VAT cases, examinations are most often engaged in the following specialities:

• 11.1 — accounting, tax records and reporting documents (covering the check of whether VAT liabilities and credit were correctly determined);
• 11.3 — documents of financial and credit operations (settlements, movement of funds, banking transactions).

What exactly the expert establishes in such a case:

• whether the VAT amount — tax liabilities and tax credit — was correctly determined according to accounting and reporting data;
• whether the declared amounts are confirmed by primary documents and registered tax invoices;
• whether the primary documents, accounting registers, returns and YeRPN data agree with one another;
• whether the assessment, penalty and interest in the act and the PPR were calculated correctly, both arithmetically and methodologically.

The limit of competence should be grasped at once: the expert does not decide legal questions and does not conclude whether the PPR is lawful. The expert answers an economic question — whether the authority’s calculations are supported by documents. The question “is the transaction fictitious” is a legal qualification and cannot be put to the expert; the correct wording is “are the business transactions between company A and counterparty B for such-and-such period documentarily confirmed, and was the VAT credit amount determined correctly.”

Typical taxpayer mistakes

• No registered invoice. Even with a real transaction and flawless primary documents, there is no right to credit without a registered invoice — a weak spot that must be closed in good time.
• Defective primary documents. Unrestored contracts, missing waybills, and acts lacking mandatory details weaken your position regardless of the quality of the expert examination.
• Discrepancies in nomenclature. When the name or code of goods in the tax invoice does not match the delivery note or the contract, the authority treats it as a sign of unreality. Nomenclature must be consistent end to end.
• A broken chain of evidence. You show the arrival of the goods but not their subsequent use or resale.
• Late action. Deadlines for administrative and judicial appeal run out quickly, and some documents can no longer be restored after the fact.

A short action plan

1. On receiving the act and the PPR, immediately check the deadlines for administrative and judicial appeal.
2. Gather the primary documents, accounting registers and YeRPN extracts for the disputed period.
3. Order a pre-litigation economic analysis to understand which amounts can be contested and why.
4. Together with a lawyer, frame your position and, where needed, the questions for a forensic examination on the economic side.
5. Submit the expert’s conclusion as evidence — and remember that it is the authority that must prove the lawfulness of the assessment.

If your input VAT credit has been removed and additional VAT assessed, do not rely on legal arguments alone — the calculations also need a professional check. I would be glad to help with a consultation or a forensic economic examination, so that your position rests on methodically confirmed facts rather than general objections.