VAT "Skrutka" in Ukraine: Schemes, Liability and Defence

The Ukrainian word skrutka (literally a “twist” or “roll-up”) is not an accounting term. It is street shorthand for a scheme in which a company reduces the VAT it owes by claiming a tax credit that sits behind no real supply of goods or services. The danger is that a bona fide business often learns about a skrutka only after the fact — when a gap in the counterparty chain is discovered somewhere “upstream” and the additional assessments land on it. Below I explain how the scheme is built, what liability follows, and — most importantly — how to document the reality of your own transactions within the law.

What VAT skrutka is in plain terms

VAT works on the principle of a difference. A taxpayer charges a tax liability (output VAT) on its sales and, at the same time, is entitled to reduce the amount payable by a tax credit (input VAT) — the VAT embedded in the price of the goods and services it has purchased. The right to a credit arises under the rules of the Tax Code of Ukraine (PKU), Article 198, and is confirmed by a tax invoice (podatkova nakladna) registered in the Unified Register of Tax Invoices (YERPN).

The entire economics of the scheme is built on this mechanism. If you “draw” an input credit without a genuine purchase, you can artificially cut the VAT payable and, at the same time, inflate expenses for corporate profit tax. This unlawful creation of a VAT tax credit through fictitious (goods-less) transactions is exactly what is called a skrutka. In a narrower sense the word also covers re-grading (peresort) — where one product carrying the “surplus” VAT enters the chain, and at the exit the same volume of tax is re-documented onto an entirely different product line that the end buyer actually needs. On paper the VAT amounts reconcile, while the customs commodity codes at entry and exit differ.

The key point to grasp at once: a skrutka is always a transaction with no real business substance. There is no movement of goods, no services rendered — and therefore no lawful right to a credit, no matter how impeccable-looking the paperwork placed beneath it.

Anatomy of the scheme: who is who in the chain

The classic construction has several links, each with its own function. Understanding these roles is useful even for an honest payer: it makes it easier to see why the claims were directed at you.

• The tax pit (podatkova yama, the benefit-generating entity) — creates the “surplus” tax credit, pays none of its own liabilities, and later disappears or is liquidated. Documentary trace: registered tax invoices with no real activity, no staff, no warehouses, no equipment.
• The transit firm (transiter) — passes turnover through itself, “diluting” the chain to hide the pit’s connection to the buyer. Documentary trace: near-zero margin, entry and exit “same day,” identical amounts.
• The beneficiary (vygodonabuvach) — a real business that receives the artificial credit and cuts its own VAT and profit tax. Documentary trace: the credit appears in the return, but there are no primary documents and no movement of goods behind it.

Between the pit and the beneficiary there may be several transit firms — which is precisely why the “gap” is often recorded two or three links away from a company that had no idea about the scheme at all. This is a matter of principle, and I return to it in the defence section.

How skrutka is detected: the state’s tools

The state has long moved the detection of such schemes into a semi-automated mode. There are several core tools.

• SMKOR — the system for monitoring the compliance of tax invoices with risk-assessment criteria. If an invoice or the payer itself matches risk indicators, its registration in the YERPN is suspended, and the payer must confirm the reality of the transaction with explanations and documents. The suspension procedure is set out in a Cabinet of Ministers of Ukraine resolution, and the criteria split into payer riskiness and transaction riskiness.
• Cross-checks (zustrichni zvirky) — a mechanism under the Tax Code (Article 73) whereby the State Tax Service compares data on a transaction held by both counterparties. This is where the mismatch surfaces between what the seller declared and what the buyer booked into its credit.
• Tax-gap analytics — automatic comparison of liabilities and credits along the supply chain. A gap is a signal, not a verdict, but an audit usually starts from it.
• Materials of the BEB and the State Financial Monitoring Service. The Bureau of Economic Security (BEB), as the pre-trial investigation body for economic offences, works with seized primary documents, bank statements and electronic databases. The State Financial Monitoring Service becomes involved when funds from the scheme show signs of money laundering.

None of these tools on its own proves fictitiousness — each merely outlines the set of transactions that must be examined on the merits, through the primary documents.

Liability for skrutka: from assessments to criminal proceedings

The consequences unfold on two planes — tax and criminal.

Tax consequences

If an audit disallows an unfounded credit, the payer is assessed additional VAT and, through the inflated expenses, additional corporate profit tax. On top of the tax itself come:

• a penalty for understating the tax liability (Article 123 of the PKU). As a general rule this is 10% of the amount, but if the controlling body proves the act was intentional — 25%, and for a repeated intentional breach within 1,095 days — 50%;
• interest for late payment (Article 129 of the PKU), accruing over the period the underpayment existed.

In practice it is the combination “assessment + penalty + interest” that makes the financial blow painful, even where matters never reach criminal proceedings.

Criminal liability

When the amount of unpaid tax reaches the threshold defined by the Criminal Code (a “significant,” “large” or “especially large” amount), a criminal dimension opens up. The qualification usually rests on several articles.

Article of the KKU	Subject	Role in the scheme
212	Evasion of taxes and duties	Core offence: understated liabilities via an unfounded credit and expenses
205-1	Forgery of documents submitted for state registration of legal entities and sole traders	Creation of front “pits” and transit firms
366	Official forgery	Entry of knowingly false data into documents by an official
358	Forgery of documents by private persons and their use	Production and use of fictitious primary documents
209	Legalisation (laundering) of proceeds	Where funds obtained from the scheme are laundered

The fate of fictitious entrepreneurship deserves a separate note. Article 205 of the KKU, under which “conversion centres” and front companies were qualified for decades, was removed from the Code in 2019. The mere fact of a counterparty’s “fictitiousness” ceased to be a stand-alone offence, and the qualification naturally shifted to the economic consequences — above all to Article 212 (evasion) and to the document-forgery articles. For business this means the investigation now has to prove not an abstract “fictitious firm” but a concrete amount of unpaid tax and the role of the primary documents in understating it.

Defending the taxpayer: how to prove your transactions were real

The most important thesis of this article: a gap in the chain does not, by itself, make your transaction fictitious. The gap is often found “upstream” — at your supplier’s supplier, several links away. And Ukrainian and European case law consistently applies the principle of the taxpayer’s individual liability: another party’s breaches are not automatically “transferred” to someone who acted genuinely and in good faith.

So the centre of gravity of a defence is not denying the scheme in general, but documentary confirmation of the reality of your own transactions specifically. What to focus on:

1. Complete primary documents for every disputed transaction — contracts, delivery notes, acceptance acts and, crucially, consignment notes (TTN). The absence of a TTN in a case about a supply of goods hits the position hardest.
2. Evidence of the physical movement of goods — warehouse records, storage and receipt data, subsequent sale or use in your own production.
3. The reality of settlements — bank statements showing genuine movement of funds, not “looped” amounts that return to the sender.
4. The counterparty’s resource capacity — whether the supplier had staff, warehouses, equipment, licences and a prior purchase of the same goods. This is not always within your reach, but the relevant arguments are worth gathering.
5. The business purpose of the transaction — a reasonable economic rationale, not merely a tax benefit. The transaction should be explained by business logic.

Typical mistakes that weaken a defence: relying only on the “cleanliness” of your own documents while ignoring the TTN and warehouse records; settling in cash or through a chain of refunds; failing to keep business correspondence and commercial offers that explain why the transaction happened. In my expert practice, it is precisely the bundle “TTN + warehouse + payment + business purpose” that most often rebuts an allegation of goods-lessness founded on nothing more than a gap in the system.

The role of forensic economic expertise

When a dispute reaches a court — administrative (under the KAS, the Code of Administrative Judiciary), commercial (under the GPK, the Commercial Procedure Code) or criminal proceedings (under the KPK, the Criminal Procedure Code) — the key question of whether a transaction involved real goods is decided not on trust but through a forensic economic examination. It is carried out on the basis of the Law of Ukraine “On Forensic Expert Activity” and the Instruction on the Appointment and Conduct of Forensic Examinations, approved by Ministry of Justice Order No. 53/5, by state specialised institutions or attested forensic experts.

What the expert establishes:

• whether the VAT tax credit for transactions with a particular counterparty over a defined period is supported by the primary documents provided;
• whether the return data correspond to the accounting records and to the invoices registered in the YERPN;
• what amount of credit or expenses is not documentarily confirmed — that is, real figures, not “by-eye” estimates.

Here a boundary of competence matters. The forensic economist establishes the documentary (non-)confirmation of a transaction and its amounts, but does not qualify the act, does not establish intent and guilt, and does not reach a legal conclusion about “fictitiousness.” The words “evasion,” “intent” and “fictitious” are for the court to assess. A correct conclusion therefore reads “the transaction is not documentarily confirmed by such-and-such indicators,” not “the transaction is fictitious.” And conversely — a measured expert opinion on the reality of transactions often becomes a bona fide payer’s strongest evidence in a dispute over assessments.

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If you are a business owner, an advocate or an investigator faced with a skrutka, a tax gap along the counterparty chain, or additional VAT assessments, it is worth checking the list of documents and the wording of the questions with a forensic economist in advance. A short consultation before the examination is even ordered helps to frame the questions correctly and confirm the reality of your transactions — I would be glad to help assess your situation.