Can late-payment interest be charged if an audit lasted for years

The Constitutional Court considered the case of NPP Klass, a joint-stock company, which was the subject of an on-site tax audit. Five and a half years passed between the date the audit was ordered (26 December 2016) and the service of the decision on its results (22 June 2022).

Throughout that time, late-payment interest was charged to the taxpayer on the amount of the arrears. The company took the view that charging the interest was unlawful, because the tax authority had substantially breached the time limits for conducting the audit and for formalising its results.

The courts of three instances, however, held the inspectorate's actions lawful. In their view, for the interest to stop accruing the taxpayer had to pay the tax voluntarily.

The Constitutional Court did not revisit the conclusions of the lower courts, but it formulated an important legal position:

If the tax authority drew the audit out so far that this caused the time limit for enforced collection under Articles 46 and 47 of the Tax Code to be missed, interest cannot be charged on that debt.

A comment by Andrey Rymarev, head of the tax practice at Consul Group:

In practice, on-site tax audits can last for years. All that time the taxpayer is in a state of legal uncertainty.

The Constitutional Court noted that a breach of the time limit for serving the audit report is permissible in itself, but only if it is not substantial. A breach is substantial where, because the audit was drawn out, the tax authority missed the time limit for collecting the debt, and interest then cannot be charged.

The Supreme Court had already expressed a similar approach, in its ruling of 5 July 2021 in the case of Neringa, a limited liability company.

But this is especially important: the Constitutional Court stated expressly that, where the time limits have been breached in a substantial way, the inspectorate's decision may be held invalid.

Why this matters

Previously a taxpayer had first to challenge the decision itself, and then to challenge the collection measures separately. The Constitutional Court now allows the inspectorate's decision as a whole to be held invalid because the time limits for collection were missed.

This is a serious step towards procedural economy and lower court costs.

We shall see how the tax authorities and the courts apply this position in practice.

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