Illegal employment is back on the list of priorities. Tax administration preparing to stop evasions of billions of korunas

In a recent interview for the daily Hospodářské noviny, the Director General of the Financial Administration Simona Hornochová reopened the topic of illegal employment, focusing in particular on disguised agency employment and false contractual relationships.

“Now we have to turn our attention to other areas – in particular corporate income tax and employment tax, which we have been neglecting somewhat compared to VAT,” Hornochová said. According to her, a number of new frauds are moving into the area of employment tax. Whether it is hidden agency employment or the more traditional form of the Schwarz System, the Revenue now has new tools in its hands – data, analytics and legislative support. For taxpayers, this means only one thing: increased risk of penalties.

Once the new Single Monthly Employer Report (UMER, which you can read about here), which Hornochová calls a “revolutionary change”, is launched, the Financial Administration will have access to data in near real time. This will mean that the identification of illegal forms of employment will no longer require years of searching or accidental detection during an inspection. Tax audit will get its hands on specific suspicious cases in the form of automatically processed analyses.

Although the Director General of the Financial Administration did not directly comment on the classic Schwarz System, it is clear between the lines that the area of so-called “alternative forms of cooperation” is becoming one of the priority targets of tax audits. We have long pointed out that the Schwarz System is not just a “grey area” but a serious legal risk with potentially devastating consequences. Our earlier article on the new penalties for the Schwarz System details recent developments in legislation and the growing pressure to enforce these rules.

You can also read about how judicial intervention in the Schwarz System can turn out in a recent decision of the Supreme Administrative Court, where workers who outwardly posed as self-employed actually met all the characteristics of dependent work. This case law is a warning to all those who still rely on the Schwarz System as a “cheaper form of employment”.

Hornochová adds that the Financial Administration is not only planning to re-launch an awareness campaign, but also to systematically share data with other authorities, including the labour inspectorate: “We thought it was beneficial in this area to have an information line that could not only go from the inspectorate to us when it detects a problem, but also so that we could alert the inspectorate when we see signs of risk in our analytical outputs. The inspectors are quite active. We are going to relaunch the campaign, which unfortunately has completely fizzled out in 2019, and again inform how these illegal models work and what tax risks they bring for companies that engage in them.”

With this move, the tax administration is making it clear that it wants to better cover problematic areas where tax and insurance evasion occurs – whether it is disguised employment, aggressive tax optimisation or circumvention of the rules through various contractual schemes. The change in strategy is intended to enable the authority to respond more quickly to new ways of misusing the system and to target areas where the risk is greatest. The aim is not to tighten the conditions across the board, but rather to provide more targeted and effective supervision of areas where the state loses billions of korunas. Data analytics, automatic sharing of information between authorities, and above all the willingness of the tax administration to go into controversial areas means that this is a decisive moment. It is not just about the risk of additional tax, but also the risk of significant penalties, legal action and negative publicity, in extreme cases even a ban on activities.