A man started a car dealership in 2011. He registered with the Chamber of Commerce and set off in good spirits. However, the business did not go well alongside his busy job as an employee. He made a loss from the very first year. Turnover fell from nearly €98,000 in 2011 to zero in 2014. In 2016 and 2017, there was again no turnover, but there were costs. When his wife fell seriously ill, the man closed the business for good. In hindsight, he acknowledges that the business stemmed from a hobby and never really got off the ground.
No investigation
At the end of 2017, the man submits his 2016 tax return, showing a business loss of over €4,500. The tax inspector issues the tax assessment in accordance with the return. He does not compare the return with those from previous years and does not carry out any further investigation. Four months later, the Tax and Customs Administration runs a nationwide query as part of the 'source assessment and start-ups' project. The man is flagged by this query. Only now does the tax inspector decide to investigate whether there is in fact a source of income.
Profit forecast
Three requirements apply to a source of income: participation in economic activity, the intention to derive a benefit, and the objective expectation that such a benefit can reasonably be derived. The first two requirements have been met. However, the Court of Appeal ruled that there is no objective expectation of a benefit. From the outset in 2011, only negative results have been achieved, with turnover falling to zero. The activities therefore do not constitute a source of income. The losses are not deductible from income from employment and the home.
The inspector should have had his doubts
When issuing a tax assessment, an inspector must compare the tax return with the information in the file, including tax returns from previous years. Those returns showed a loss year after year. The inspector should reasonably have had doubts as to the accuracy of the business loss declared. He should have carried out a further investigation before issuing the 2016 tax assessment. By failing to carry out this further investigation, he committed an administrative breach. This precludes the imposition of a supplementary assessment.
Query confirms the absence
The court sees this as confirmation of the fact that the inspector did, in fact, launch an investigation following the query. That query contained the same information regarding the losses incurred over several years as the tax returns. Without a satisfactory explanation, it is not clear why the query did prompt an investigation whilst the tax returns did not. The 2016 additional assessment is set aside. The 2017 tax assessment remains in force, as it had not yet been definitively imposed when the inspector commenced the investigation.