Twenty-seven thousand six hundred euros — that's what one Latvian startup paid in 2025 for a single accounting mistake. Incorrectly classified transactions with a related company, discovered by the State Revenue Service (VID) during a routine audit. The company survived, but the following year's growth budget went up in smoke. We see this regularly: not deliberate schemes or bad faith, but misunderstandings, haste, and ignorance. In 2026, with VID now even more technologically capable and tax regimes more complex, mistakes cost more than ever. Here are the ten we see most often.
Mistake 1: Mixing Personal and Business Finances
This is the single most common mistake among new entrepreneurs. When the SIA is fresh and cash flow is tight, the owner pays for business needs from their personal account, and vice versa — personal purchases from the company account. It seems harmless at first, but the consequences accumulate.
Real consequences:
VID may classify these transactions as deemed profit distributions and apply 20% corporate income tax (CIT)
The accountant cannot track which expenses are business and which are personal, so all questionable ones are treated as non-business expenses
At year-end, it turns out the company's profit is artificially inflated (because personal expenses couldn't be deducted), or the personal account is short of funds
How to avoid it:
Open a separate business bank account before your first transaction — this is not just a recommendation but a mandatory requirement
If you must pay from your personal account, immediately prepare an advance report with all receipts and document it in your accounting
Pay yourself a fixed "salary" from the business and don't transfer money to your personal account haphazardly
Mistake 2: Putting Off Accounting "For Later"
Many new entrepreneurs assume accounting can be sorted out "when there's time" — usually just before the annual report is due. In 2026, this approach is especially dangerous because VID has introduced a taxpayer rating system that also evaluates the timeliness of declaration submissions.
Real consequences:
Late VAT return: penalty up to €700 (source: Law "On Taxes and Duties"). Late payment interest of 0.05% per day on the unpaid amount — on a €10,000 debt, that's €5 per day, €150 per month
Late annual report: fine up to €600, and after 8 months of delay, the Commercial Register can initiate forced liquidation
Late employer report: penalty up to €200 per reporting month
How to avoid it:
Set calendar reminders for all deadlines (VAT return by the 20th, employer report by the 17th, CIT return by the 23rd)
Use accounting software that automatically reminds you of upcoming deadlines
Hand your accounting to a professional who takes responsibility for meeting deadlines
Mistake 3: Missing or Non-Compliant Primary Documents
The law requires every business transaction to have a supporting document — an invoice, receipt, contract, or acceptance certificate. Without a document, the expense is not deductible, no matter how genuine it was.
Real consequences:
Expenses without documents = non-deductible expenses = higher profit = higher CIT
Input VAT deduction without a proper invoice is impossible — you lose 21% of the amount
In a VID audit, the document is the only proof. Without it, the inspector assumes the worst-case scenario
How to avoid it:
Implement a digital document storage system — scan or photograph every receipt immediately upon receipt
Keep documents for at least 10 years (the legally required retention period)
Ensure every invoice contains all mandatory details: seller and buyer details, VAT amount, date, and number
Mistake 4: Ignoring EDS Notifications
The "Messages" section of EDS regularly receives notifications from VID. New entrepreneurs often leave them unread — "if it's important, they'll send a letter." This is a dangerous approach, as EDS is the official communication channel, and an unread notification is legally equivalent to one received.
Real consequences:
Unread request to clarify data → unanswered within the deadline → automatic penalty
Unread notification about a tax debt → late payment interest continues accruing at 0.05% per day
Unread warning about a late return → additional penalties and account blocking
How to avoid it:
Set up EDS notification forwarding to your email
Schedule 15 minutes once a week (e.g. Friday) to check EDS messages
Delegate EDS monitoring to your accountant, but retain access so you stay informed of key matters
Mistake 5: Misunderstanding Micro SIA Dividend Restrictions
The micro SIA (share capital up to €2,799) is a popular choice for beginners, but this form comes with significant restrictions that many only discover when they want to pay out their first dividends.
Key restrictions:
Dividends cannot be paid out until accumulated equity reaches €2,800
At least 25% of each year's profit must be retained in the company as a statutory reserve
These restrictions also apply to other payments to shareholders
Real consequences:
If dividends are paid in violation of the restrictions, the payment is treated as a loan to the shareholder or a deemed profit distribution, with corresponding tax consequences
CIT may be applied retroactively to "prohibited" dividends
How to avoid it:
If you plan to take dividends in year one, form a standard SIA with €2,800 share capital
If you already have a micro SIA and want to pay dividends, consult an accountant about your equity structure and the necessary changes
Mistake 6: Assuming All Expenses Are Business Expenses
"I work from home, so the rent is a business expense." This kind of logic is common but wrong. Not every expense that is somehow connected to your business is deductible in full.
Typically misclassified expenses:
Full apartment rent when only one room is used as an office
Full family car costs when it's also used for private purposes
Restaurant bills without a description of the business purpose
Gifts and souvenirs exceeding the representation expense limit
How to avoid it:
For any expense that could be partially personal, determine the business-use proportion and document it
For home office expenses, sign a separate rental agreement between yourself as the owner and the SIA, specifying the exact floor area and rent
For representation expenses, track the limit — 5% of the previous year's gross wages
Mistake 7: Paying Salaries in Cash Without Documentation
Since 2025, employers are required to report cash wage payments to VID. But even before that, undocumented cash salaries were one of the most common triggers for VID audits.
Real consequences:
Without a signed salary payment record or other proof, VID may treat the salary as unpaid and demand payment of social contributions and PIT with late interest
The employee could claim the salary was not received and demand it again through the courts
How to avoid it:
Switch to non-cash salary payments — this is the simplest and safest method
If cash is unavoidable, prepare a salary payment record with the employee's signature every time
Report every cash salary payment to VID, specifying the amount and date
Mistake 8: Putting Off Year-End Reconciliation
Many companies delay reconciling bank accounts, receivables, and payables until the last moment before filing the annual report. The result: errors made in haste, undiscovered discrepancies, and a missed filing deadline.
Real consequences:
Unreconciled balances with customers and suppliers → inaccurate annual report → VID questions and a potential audit
Late annual report → penalties and reputational damage
How to avoid it:
Reconcile bank accounts monthly, not once a year
Send out debtor and creditor reconciliation statements at least quarterly
Start preparing the annual report in January, not April
Mistake 9: No Written Contracts for Services Received
Latvian law does not require a written contract for every service, but the absence of one creates problems in accounting and during tax audits. This is especially true for marketing, consulting, and IT services.
Real consequences:
VID may question the legitimacy of the expense if there is no contract describing the service provided
In a dispute with the service provider, you have no proof of the agreed terms
For transfer pricing documentation (if transactions with related parties exceed €250,000), a contract is mandatory
How to avoid it:
Sign written contracts for all services exceeding €500 in value
Include at least: party details, service description, price, completion deadline, and liability
Store contracts together with invoices and acceptance certificates
Mistake 10: Believing an Accountant Can Wait
"I'll set up the SIA, start working, and then look for an accountant." This approach is responsible for roughly 40% of the first VID inquiries we see for new clients. The SIA's obligation to maintain accounting begins with the first business transaction — not with the first declaration deadline.
Real consequences:
First invoices issued without VAT (if the company is a VAT payer) → corrections needed, possible penalties
First expenses not processed as advance reports → they don't appear in the books → profit is artificially inflated
In the VID rating system, the company instantly receives a poor assessment if the first return is filed late or with errors
How to avoid it:
Bring in an accountant before you issue your first invoice — ideally, at the moment of registration
In your first consultation with the accountant, clarify: how to issue invoices correctly, how to document expenses, what documents to keep
Don't have a "trial period" without an accountant — even if it's only for a month
Accounting mistakes in startups are nothing unusual, but their price can be disproportionately high. VID in 2026 is better equipped than ever to detect them — automated data matching, a taxpayer rating system, and enhanced controls make "maybe they won't notice" a dangerous strategy. Most of these mistakes can be avoided with a single decision: bring in a professional accountant from day one.
Last updated: April 2026. Information is based on Balansis client experience, the Law "On Taxes and Duties" with 2026 amendments, and official VID materials.
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