News and developments
The CJEU rules on the liability for the payment of VAT arising from fraudulently issued invoices
that employees may be declared personally responsible to pay amounts of VAT indicated on invoices fraudulently created and issued by them without their employer’s knowledge or consent.
Background of the Case
This case originated following a tax audit undertaken by the Polish Tax Authorities in respect of a company which operated a retail business for the sale of fuel at a petrol station (the “Company”) from 2001 until 2014. An employee of the Company (the “Employee”) was entrusted with the management of the operation of the Company during such period, and their duties included the management of staff at the petrol station and the issuing of invoices to customers.
It transpired that such invoices had indicated VAT amounts that did not reflect the actual sales made by the Company’s retail business. Between January 2010 and April 2014, approximately 1,700 invoices (totalling approximately EUR 320,000) had been issued in the name of the Company without its consent or knowledge. Such invoices were sold, for the Employee’s own account, to unrelated third-party entities, whereby such third-party entities sought, in turn, to fraudulently obtain an undue deduction of the VAT so indicated in the false invoices.
Notably, the VAT amounts indicated were not recorded in the Company's accounts, nor were they accounted for in the Company’s tax returns and, as a result, the corresponding VAT was not paid into the Polish state budget. The Polish Tax Authorities, following the conclusion of the tax audit for this period, issued a decision wherein it determined the VAT liability for the above invoices as being a liability of the Company in whose name such fraudulent invoices were issued. Such decision was challenged by the Company before the Polish National Courts, and the Polish Supreme Administrative Court (hereinafter “PSAC”) at appeal stage opted to stay proceedings so as to request a preliminary ruling from the CJEU on this matter.
The Applicable Law
The VAT Directive, in Article 9, defines a “taxable person” for VAT purposes, as being any person who independently carries out in any place any economic, whatever the purpose or results of that activity. Additionally, Article 203 of the VAT Directive establishes that VAT shall be payable by any person who enters the VAT on an invoice.
Moreover, Article 205 of the VAT Directive allows EU Member States the option, when implementing their own domestic VAT laws, to provide that in certain circumstances another person (that is, other than the taxable person concerned) may be jointly and severally liable for the payment of VAT to the Tax Authorities of the relevant Member State. The Polish law on the tax on goods and services avails of this option, and states that where (i) a legal person; (ii) an unincorporated organisational unit, or; (iii) a natural person issues an invoice in which the amount of tax is shown, they are, in certain circumstances, obliged to pay such tax on goods or services.
Conflicting Domestic Interpretation
It transpired during the course of proceedings that the Polish Courts had yet to fully settle on a singular interpretation of the domestic transposition of Article 203 and Article 205 of the VAT Directive. Of the two prevailing domestic interpretations of the provision cited above, the first suggests that an employer should be held liable for the VAT indicated on the false invoices, regardless of the fact that it was the employee who issued them, thus emphasising that the employer should assume the risks associated with the obligations of its business and with selecting its employees and, ultimately, that it should bear the risk for any fraudulent activities carried out by them.
On the other hand, another interpretation suggests that the fraudulent employee should be considered “the person who entered the VAT on the invoices” and, therefore, should be held liable for the VAT payable, therefore, alternatively emphasising the importance of individual responsibility and insisting that employers should not automatically be held accountable for the fraudulent actions and misconduct of employees.
The Questions referred to the CJEU
The PSAC thus referred two key questions to the CJEU.
The First Question, concerning Article 203 and Article 205 of the VAT Directive, asks whether liability to pay the VAT so indicated on the abovementioned fraudulent invoices falls to:
Author: Benjamin Farrugia
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- The Company, being a taxable person for VAT purposes and whose details were (fraudulently) used to complete such invoices, or;
- The fraudulent employee who (unlawfully) entered the VAT on such invoice using the employer’s details.
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- The identity of the fraudulent employee/s is known to the investigating tax authority; and
- The Employer exercised reasonable diligence in monitoring the Employee's conduct.
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- a duty of care by an employer to its employee/s, particularly when the employee is responsible for issuing invoices showing VAT in the name of / on behalf of the employer, and;
- that when there are indications of fraud, a reasonable trader should make inquiries about the other trader from whom they intend to purchase goods or services to ascertain their trustworthiness.
Author: Benjamin Farrugia