The CJEU rules on the liability for the payment of VAT arising from fraudulently issued invoices

Introduction

The Court of Justice of the European Union (the “CJEU”) in Case C-442/22, Dyrektor Izby Administracji Skarbowej w Lublinie, has ruled on the basis of Article 203 of Council Directive 2006/112/EC on the Common System of Value Added Tax (hereinafter the “VAT Directive”), 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:

1. The Company, being a taxable person for VAT purposes and whose details were (fraudulently) used to complete such invoices, or;
2. The fraudulent employee who (unlawfully) entered the VAT on such invoice using the employer’s details.

Secondly, PSAC asked the CJEU whether it was relevant to the matter at hand that the board of management of the Employer, for the purposes of the VAT Directive, had failed to exercise sufficient due diligence in its supervision of the Employee’s activities.

Findings of the Court

The CJEU, upon consideration of questions posed by PSAC, noted from the outset that for Article 203 to be applicable to the circumstances at hand, an “issuer of an invoice” indicating an amount of VAT should be responsible for such amount where there is a risk of a loss of tax revenue, irrespective of any fault or misconduct.

Secondly, as Article 203 makes use of the phrase “any person”, the CJEU declared that such provision may, in theory, even capture natural persons who are not taxable persons for VAT purposes, which, in this case, would include the Employee.

Thirdly, the CJEU held that it would be incorrect, on the basis of Article 203, to find against an Employer whose identity has been misappropriated by a third-party for the purposes of fraud, however, the CJEU went on to declare that the VAT liability would only shift away from the Employer in those circumstances where;

1. The identity of the fraudulent employee/s is known to the investigating tax authority; and
2. The Employer exercised reasonable diligence in monitoring the Employee’s conduct.

Thus, the CJEU clarified that an employer would not be automatically liable for the payment of VAT indicated on false invoices, provided that they upheld their inherent duty as taxable persons for VAT purposes to prevent or mitigate (to the extent possible) risks of losses of VAT revenue through tax fraud. It held that such duty extends to include;

1. 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;
2. 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.

In this instance, the CJEU, contrary to the Opinion of Advocate General Kolkott, found that the Employer had clearly neglected their duty to supervise and monitor the Employee’s activities, implying to the PSAC that the liability for the payment of the VAT indicated in the false invoices had not shifted to the fraudulent Employee, but rather, remained with the Employer as a taxable person for VAT purposes.

Concluding Remarks

The CJEU, in Case C-442/22, has provided important guidance on the interpretation of the VAT Directive for EU Member States by clarifying the allocation of responsibility in respect of unlawful practices concerning the issuing of fraudulent invoices designed to circumvent the payment of VAT into the state budget. The ruling emphasizes the importance of individual accountability while recognizing the role of employers in exercising reasonable diligence in monitoring their employees’ actions.

Disclaimer: Ganado Advocates is responsible for contributing this law report but was not in any way involved as legal advisor for the parties in the judgement being covered in this law report. This article was first published in The Malta Independent on 20/03/2024.

Author: Benjamin Farrugia (Trainee Advocate, Ganado Advocates)