Why were private expenses that were posted rejected during a VAT audit?

A start-up company (a legal entity, either a private or a public company) asked us about the results of an audit by the Federal tax administration. During the audit, it was discovered that the owner/managing director had paid private holiday expenses via the business account and posted them as business expenses. The VAT auditor listed the private holiday expenses as expenses that were not justified for business purposes, and so not valid for the deduction of input tax. As VAT (input tax) was claimed for these expenses, the amount needed to be corrected subsequently in a declaration and repaid. But not content with that, the VAT auditor reported these transactions internally to the withholding tax department and to the tax administration of the canton of the owner’s residence. 

The VAT deduction is considered a so-called benefit in kind, and has an additional impact on the corporation and withholding taxes at the company level, and on income tax for the owner (shareholder or partner). The reimbursement of the 35 % withholding tax paid by the company to the owner could potentially be refused in this case. The total tax charge in this case becomes well over 50 % (company and owner level).

Our proposed solution is to clearly differentiate and separate private and business expenses, as the currently applicable rules require, in order to avoid or at least minimize the multiple tax risks.

Authors: Fabian Lüscher / David Gisin