Income Ledger: Can You Forget About It?
In an era of processes digitalization and extreme conditions for business operation, many entrepreneurs simply forget to record their income and expenses in a paper ledger or an Excel spreadsheet. As a result, fines for the “improper maintenance of income and expense records” have become much more frequent. So, let us examine who is strictly required to maintain such records and who does not need to worry about them.
According to the law, single tax payers in Groups 1 and 2, as well as Group 3 non-VAT payers, may keep their records in any form they choose. They may therefore decide for themselves what format to use. It can be the traditional Income Ledger, Excel spreadsheets, specialized services, or even a paper notebook. There is no need to register anything with the tax authorities. Entrepreneurs may record the total amount for the month or keep daily records with a monthly total. However, if single tax payers sell their own agricultural products, they are required to keep separate records of the income and expenses related to such activities. At present, neither the Tax Code of Ukraine nor the Code of Ukraine on Administrative Offences provides for liability of single tax payers for the improper record-keeping. However, fines may apply if primary documents, accounting and other registers, financial statements, or other documents related to the calculation and payment of taxes and duties are missing. The fine ranges from UAH 1,020 to UAH 2,040.
Individual entrepreneurs operating under the general taxation system, however, are required to use the Standard Form approved by Order of the Ministry of Finance of Ukraine No. 261 of 13.05.2021. Records may be kept either in paper or electronic form, provided that they are maintained in a timely manner. There is also no need to register the paper form with the tax authorities. Electronic records may be maintained in EXCEL format. However, the most convenient option is to keep records in electronic form through the Taxpayer’s Electronic Cabinet, which also uses the above-mentioned Standard Form. All that is required is a qualified electronic signature (QES), which all entrepreneurs already have. In the event of a documentary tax audit, the entrepreneur must provide printed copies of electronic documents. If there are only a few pages, each page must bear the wording “Certified true copy,” the position of the person certifying the documents (or “Individual entrepreneur”), their signature, first name and surname, and the date of certification. If there are many pages, all pages must be compiled, bound with thread, and certified. If the individual entrepreneur uses a seal, it shall be mandatory affixed.
The record-keeping procedure is strict. At the end of each business day during which income was received or expenses were incurred, the entrepreneur must record the income received and the expenses supported by documentary evidence. If no income was received or no expenses were incurred, zeros must be entered. The form may not simply be left blank. The same requirement applies to monthly, quarterly and annual totals. Income and expense records must be maintained on a cumulative basis in hryvnias and kopecks and used to complete the annual tax return on property and income and to calculate advance payments of individual income tax and the single social contribution. The Standard Form must not only be completed but also stored for three years after the end of the reporting period in which the last entry was made.
If an entrepreneur fails to complete the Standard Form in a timely manner, they may be held liable based on the results of the tax audit. Pursuant to the Tax Code of Ukraine failure to maintain income and expense records according to paragraph 121.1 of Article 121 of the Tax Code of Ukraine provides for a fine of UAH 1,020 for the first violation and UAH 2,040 for a repeated violation within one year. The moratorium on tax audits during wartime has been lifted. These fines are therefore now commonly imposed.
Entrepreneurs operating under the general taxation system should also be aware that the tax authorities may independently assess their tax liabilities and impose penalties for the underpayment of taxes if, due to the absence of the required records, it is impossible to determine the amount of their income or expenses. This is because entrepreneurs on the general taxation system calculate their taxable income on the basis of the records reflected in the Standard Form (as the difference between revenue and expenses supported by documentary evidence). If expenses are not entered in the form and are not supported by primary documents, there are no grounds for reducing taxable income by the amount of those expenses. Taxes will therefore have to be assessed on the full amount of revenue, which may result in substantial liabilities.
An entrepreneur may also be held liable if they lose, damage, or prematurely destroy the Standard Form or the register used to maintain their records, and fail to notify the tax authorities and restore the records in a timely manner. Pursuant to the Tax Code of Ukraine, if any of the above-mentioned events occurs, an individual entrepreneurs must notify the tax authority at their place of registration in writing within five days of the event. The entrepreneur then has 90 calendar days to restore the Standard Form, starting from the day following the submission of the notification. If the Standard Form or accounting register is not restored, or if it is lost again, the individual entrepreneur may face administrative or financial liability in the amounts specified above (Public Information and Reference Resource, category 104.13).
Natalia Shcherbak
Accounting and Tax Consultant