VAT security deposit

What it means

A VAT security deposit is cash or a bank guarantee the tax office can demand when registering a payer where it sees a risk the tax will not be paid.

The grounds are usually a director’s or member’s history in other companies with arrears, or the nature of the planned activity. The decision is reviewable, but an appeal does not suspend it.

A VAT security deposit should not be confused with tax securing in tax proceedings. The latter is imposed on a taxpayer at risk of not paying tax already assessed or expected. The VAT deposit comes earlier: on entry into the VAT system, before the first invoice with VAT, and it protects the budget from a risk the tax office sees in advance.

How it works in practice

In practice it freezes money at the start of a business, when it is needed most. So the founders’ history is assessed before the registration application is filed.

The deposit is returned after a set period if the company meets its duties. It is applied against arrears as they arise, so the office need not hold it to the end.

When we set up a new company with a client, we check whether any founder appears in the lists of tax debtors or in dissolved companies with arrears. If so, we tell the client up front to budget for the office’s demand in the first months, and we prepare material that answers the risk, such as a business plan and contracts with customers.

What to watch out for

Failing to provide it means registration is not completed and the company cannot invoice with VAT. With trade already running that stops the whole model, not just one delivery.

The money deposited is neither a cost nor a deductible expense. In the books it is a receivable from the tax administrator and does not touch profit or loss. Booking it as an expense distorts both the result and the assets, and forgetting it means it cannot be matched when it is returned or applied against arrears.