False invoicing: understanding the legal and tax risks
The creation of false invoices is a serious offence with multiple consequences. This fraudulent practice exposes companies and their directors to severe criminal penalties and substantial tax reassessments. Understanding the legal and tax implications of this problem is essential to avoid legal proceedings.
What is a false invoice?
A false invoice is a fictitious accounting document that does not correspond to any actual service or delivery. There are two main categories: convenience invoices, issued between real companies but for non-existent services, and fictitious invoices, created from scratch with false suppliers. This type of invoicing can take several forms: completely invented invoices, artificial mark-ups of real amounts, or invoicing for non-existent services.
This fraudulent practice is particularly prevalent in certain sectors, such as construction, catering and business services. Every year, the tax authorities detect several billion euros worth of fraud linked to false invoices, representing around 15% of irregularities detected during tax audits. This issue is part of the wider fight against tax fraud waged by the tax authorities. Companies in all specialist sectors may be affected by these in-depth audits.
The motivations behind the creation of false invoices generally include the artificial reduction of taxable profit, the fraudulent recovery of VAT (representing on average 20% of the amount of fictitious invoices), or the justification of illegal cash outflows. These practices generate an estimated tax loss of over 20 billion euros annually for the French state.
Penalties incurred
The French penal code severely punishes the creation and use of false invoices. Penalties include up to 5 years’ imprisonment and a fine of 375,000 euros for the offence of forgery. For legal entities, the fine can reach 1,875,000 euros (i.e. five times the amount for individuals).
Company directors can also be prosecuted for misuse of corporate assets when false invoices are used to embezzle company funds. This offence carries a 5-year prison sentence and a 375,000 euro fine. Additional penalties may include a ban on managing a company for up to 5 years, confiscation of the assets used to commit the offence, or temporary closure of the establishment. Recently, the Paris Court of Appeal sentenced an executive to 3 years “imprisonment, including 18 months” imprisonment, and a fine of 200,000 euros for damages of 2.3 million euros.
Penalties are increased when the loss exceeds certain thresholds: above 50,000 euros in evaded duties, tax penalties rise to 80% of the sums concerned. Recidivism is also a factor in the increase in penalties handed down by criminal courts. According to Ministry of Justice statistics, over 1,200 convictions for tax fraud were handed down in 2023, with an average sentence of 8 months’ imprisonment.
Tax consequences
The tax authorities have extensive means at their disposal to penalize the use of false invoices. The first consequence is a tax adjustment, which calls into question any deductions wrongly made.
Tax penalties are added to tax reminders. They can amount to 80% of the duties evaded in the case of fraudulent maneuvers. For corporate income tax, these surcharges represent considerable amounts.
VAT is also subject to specific adjustments. The tax authorities can call into question VAT deductions based on fictitious invoices, and claim interest for late payment.
How the authorities detect false invoices
The tax authorities use a number of sophisticated methods to identify false invoices. Computerized cross-checks are based on interconnected databases, which can be used to detect inconsistencies between the VAT returns, profit and loss statements and accounting records (FEC) of different companies. In particular, these automated cross-checks reveal invoices issued without any counterparty at the recipient’s premises.
New technologies are revolutionizing government detection capabilities. Artificial intelligence and big data tools now analyze massive volumes of data to identify complex fraud patterns. These algorithms detect statistical anomalies and atypical behaviors that escape traditional controls, with a constantly improving detection rate.
Compulsory electronic invoicing, which is gradually being rolled out, considerably strengthens the means of control. Electronic invoicing enables real-time monitoring of invoicing flows, and facilitates automatic cross-checking between companies. This gives the authorities an instant, global overview of commercial exchanges.
In-depth tax audits examine the reality of invoiced services. Auditors analyze financial flows, contracts and the economic consistency of declared transactions. Every year, several thousand audits specifically target the risk of false invoicing in the most exposed sectors.
International cooperation is intensifying to detect cross-border schemes involving false invoices. The automatic exchange of information between European tax authorities is making it possible to track down fraud schemes using shell companies in different countries.
Tax rescripts can also reveal dubious practices when companies ask the tax authorities about complex arrangements involving artificial invoicing.
Possible remedies in the event of accusation
Faced with an accusation of false invoicing, there are several possible defense strategies. The first line of defense is to contest the reality of the facts, by demonstrating the actual existence of the services invoiced.
The assistance of a specialized lawyer is essential to organize the defense. Disputes with the authorities can be resolved through negotiation or litigation.
Good faith can also be invoked when a company has been deceived by a dishonest supplier. This defense requires proof of the care taken to verify the reality of the services provided.
Prevention remains the best protection against the risks associated with false invoicing. Implementing rigorous internal control procedures and seeking the support of specialized legal advisors can help avoid these major pitfalls for the company.
The most exposed business sectors
Certain sectors of the economy are particularly vulnerable to the phenomenon of false invoicing. The construction industry tops the list, with its complex subcontracting chains and numerous transactions. The catering industry is also particularly vulnerable, with undeclared purchases and concealed receipts. Finally, business services, particularly intellectual services, are a breeding ground for fraud.
Fraudulent schemes vary from sector to sector:
– In the construction industry: fictitious subcontractor invoices or material cost mark-ups
– In the catering industry: false supply invoices to justify cash outflows
– In the service sector: invoicing for intangible services that are difficult to verify.
Several specific risk factors explain this over-representation. Undeclared work facilitates the creation of parallel billing circuits. Cascading subcontracting dilutes responsibilities and complicates controls. As for intangible services, their intangible nature makes it particularly difficult to verify their reality and value, creating a grey zone conducive to abuse.
Frequently asked questions
False invoices represent a major risk for businesses, with significant legal and tax consequences. This section answers the most frequently asked questions on this complex topic of tax law.
What is a false invoice?
A false invoice is an accounting document which does not correspond to a real transaction, or which mentions inaccurate information (amounts, services, dates). It may concern fictitious goods or services, overvalued prices, or transactions between related parties aimed at artificially minimizing tax. This practice constitutes tax fraud, punishable by criminal and administrative penalties.
What are the legal risks of false invoicing?
Legal risks include criminal penalties of up to 5 years’ imprisonment and a fine of 75,000 euros for tax fraud. In addition, there are administrative sanctions: tax reassessment, penalties ranging from 40% to 80%, interest on arrears, and the possibility of publication of the judgment. The tax authorities can also initiate flagrante fiscale proceedings, involving searches and seizures.
What are the tax consequences of a false invoice?
The tax consequences include a reminder of the tax evaded (VAT, corporation tax, territorial economic contribution), plus substantial penalties. The deductibility of fictitious expenses is called into question, leading to an increase in taxable profit. The company also loses the right to deduct VAT, creating a considerable financial impact on its cash flow.
How do you spot a fake invoice?
Detection involves a number of checks: consistency between the invoice and the services actually received, validation of the supplier’s legal existence, verification of prices charged in relation to the market, verification of VAT and SIRET number. It is also necessary to analyze the regularity of financial flows and ensure the economic reality of the operations invoiced.
What are the criminal penalties for false invoicing?
False invoicing carries severe criminal penalties: up to 5 years’ imprisonment and a fine of 75,000 euros for tax fraud, which can be increased to 500,000 euros in the case of organized fraud. These penalties may be accompanied by professional bans, confiscation of assets and publication of the judgment. Recidivism considerably increases the penalties incurred.
How can you protect yourself against the risk of false invoicing?
To protect ourselves, we need to put in place rigorous internal procedures: systematic validation of suppliers, consistency checks on invoices, training for accounting staff, and regular audits of processes. It is advisable to consult a tax lawyer to secure practices and benefit from preventive legal support in the face of tax audits.