Taxpayer’s liability for employee’s actions and due diligence in VAT – fundamental judgments of the CJEU
Recently, the Court of Justice of the European Union has passed two important rulings in cases related to the liability of VAT taxpayers for tax fraud in which their enterprises have become embroiled.
The rulings address the liability of VAT payers for actions taken by their employees and the requirements of good faith and due diligence. The authorities had some doubts regarding the party to be held liable for issuance of fake invoices on behalf of the company: the taxpayer or the person who actually issued them on behalf of the taxpayer, i.e. an employee (Judgment in case C-442/22), and the limits of due diligence on the part of the taxpayer in case of cooperation with a dishonest contractor (Judgment in case C-537/22)
CJEU Judgments
In a judgment published on 30 January 2024 (C-442/22) the Court took the stance that tax authorities should not automatically hold a VAT payer liable for fake invoices issued by the payer’s employees. The Court held that if an employee issued a fake invoice using the employer’s identity without that employer’s knowledge or consent, that employee must be held accountable for their actions and be obliged to pay the VAT shown in such fake invoices. However, if an inspection carried out by tax authorities demonstrates that the VAT payer failed to exercise due diligence in supervising the employees, the VAT payer may be liable and suffer the consequences as perpetrator.
In a judgment of 11 January 2024 (C-537/22) concerning cooperation between a VAT payer and a dishonest contractor, the Court identified some important principles that should guide tax authorities before denying the taxpayer the right to deduct VAT. According to the CJEU’s guidelines, although a taxpayer should be required to exercise due diligence to gain certainty that the taxpayer is not involved in any tax fraud, the measures taken by the taxpayer, as expected by tax authorities, must not put an excessive burden on the taxpayer or exceed the scope of the taxpayer’s duties or competencies. For this reason, when verifying contractors, the taxpayer should only take such measures as are reasonable and appropriate to the circumstances of the case. In addition, the Court emphasized that national due diligence guidelines applied by tax authorities must be consistent with the CJEU case law.
What does it mean for entrepreneurs?
Conclusions of the CJEU rulings are crucial for tax practice and provide important guidance for taxpayers.
The first of the aforementioned rulings allows taxpayers to safeguard against the activities of their employees, which (as experience has shown) has always posed a major practical problem. At the same time, tax authorities tended to adopt a very restrictive approach to this issue by “penalizing” taxpayers for the criminal activities of their employees or associates.
This verdict shows that control and security mechanisms should be considered, which, on the one hand, will make it possible to demonstrate that an employee was acting beyond the scope of his or her authority and competence, while at the same time, they will confirm that controls are in place in a particular area.
The foregoing can offer a strong line of defense for the taxpayer in a situation where the taxpayer’s employees are involved in criminal activities under the cover of the taxpayer’s business.
The other judgment (C-537/22) defines the limits of due diligence requirements in the verification of counterparties that tax authorities and national regulations or guidelines may impose on taxpayers (including, for example, those arising from the methodology for assessing due diligence by buyers of goods in domestic transactions, as proposed by the Ministry of Finance). In particular, the judgment indicates that the tax administration or national regulations cannot take a more restrictive approach than that resulting from the
CJEU rulings.
The two CJEU rulings should be read together as being mutually complementary and clarifying the issues of VAT risk management and taxpayers’ due diligence obligations.
In our opinion, the rulings should be reflected in internal tax procedures adopted by VAT taxpayers in their enterprises.
You are welcome to contact our experts if you would like to know more about the limits of due diligence and entrepreneurs’ obligations in this respect.
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