Counterparty errors that lead to fines: how to protect your business from tax risks

In the modern business environment, choosing a reliable counterparty has long ceased to be a mere formality. Even a single mistake by a partner may become grounds for fines, additional tax assessments, or even blocking of tax invoices. It is not uncommon for companies that diligently perform their obligations to face claims from supervisory authorities precisely because of the negligence or unlawful actions of their counterparties.

1. Errors in registration data: “small details” that cost a lot
   The most common issue is incorrectly completed or untimely updated registration data of the counterparty. A change of director or registered address may seem like a technicality. However, in practice this can lead to legal conflicts: a contract is signed by a person who has already lost their authority, or document flow is directed to an outdated address.
   Tax authorities often use such “formal” inconsistencies as an argument to treat a transaction as non-genuine. As a result, the purchasing company risks losing the right to deduct expenses or claim VAT input credit.
2. Issues with tax invoices
   Late or incorrect registration of tax invoices is one of the key reasons for penalties. If the supplier fails to register the invoice on time, the purchaser’s VAT credit is at risk. In some cases, the business may lose it completely if the deadlines are irreversibly missed.
   It is also important to mention situations where the counterparty turns out to be a fictitious VAT payer. In such cases, the tax authority often treats the transaction as “non-real”, even if all documents are properly issued and the goods or services have in fact been received.
3. Mismatch between actual operations and documents
   Another typical mistake is the discrepancy between the actual delivery conditions and those specified in contracts or primary documents. For example, the goods are delivered to a different address, or delivery notes are signed by unauthorised persons.
   In such situations, the tax authority may question the very fact of the business transaction. Court practice shows that formally correct but factually inconsistent documents are a weak argument in defending a company during an audit.
4. Problems with the counterparty’s business reputation
   Supervisory authorities increasingly verify the “business purpose” of transactions and the reality of business activities. If a counterparty has no staff, production resources, assets, or clearly does not carry out economic activity, this raises suspicion of fictitiousness.
   Even if your company acted in good faith, the lack of “due diligence” when choosing a partner may result in denial of VAT credit or fines. Court practice confirms that responsibility for checking counterparties lies not only with tax authorities, but also with the business entities themselves.
5. Errors in drafting contracts and primary documents
   A contract signed without specifying essential terms, or a specification without signatures, are typical reasons why a transaction may be declared invalid or non-real. The tax service actively relies on this argument during audits, since the absence of a signature or stamp (where required by the contract) allows it to question the very fact of performance.
   Equally risky is when documents are backdated or contain conflicting dates. Such inconsistencies are inevitably revealed during tax monitoring and may trigger penalties.
6. Participation in risky schemes: supply “chains”
   Businesses often find themselves in a chain of transactions with counterparties that exist only formally to document dubious operations. Even if your company is at the end of such a chain and has no intention of tax evasion, it may still become subject to VAT credit blocking or be classified as a “risky taxpayer”.
   Only systematic prevention helps in such cases: checking counterparties’ history, analysing typical risk codes in the Unified Register of Tax Invoices, and monitoring court decisions concerning potential partners.
7. Negligence in communication and evidence retention
   In many disputes, the taxpayer cannot promptly confirm the actual performance of a contract. The absence of correspondence, acceptance certificates or even basic proof of goods transportation plays into the hands of the tax authorities.
   Today, the evidentiary base must be preserved not only on paper but also in electronic form: e‑mail, messengers, internal orders, GPS data of carriers. All of this may become convincing evidence of good faith during an audit.
8. How to minimise risks
   To avoid the consequences of others’ mistakes, each company should implement an internal counterparty screening mechanism. It should include:
   checking registration data via the Unified State Register and the VAT payers’ register;
   analysing court decisions related to the counterparty;
   verifying contact persons, and the existence of an office or production facilities;
   keeping copies of all documents and communications;
   performing periodic checks even of long-term partners, as the status of any company may change.
   Thorough counterparty due diligence at the contract stage is not only a legal safeguard but also a matter of financial security. Even a minor error by another company can cost yours tens of thousands of hryvnias in penalties and lengthy litigation.

Author – Yuliia Popadyn, attorney in tax and housing law practice at the Attorneys Association “WINNER Law Firm”.

If you have any questions or issues related to counterparty due diligence, tax risks, or appealing decisions of supervisory authorities, the experts of WINNER Law Firm are ready to provide professional assistance and protect your interests.