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CJEU Judgment: Joint liability for VAT - increased Importance of audit

On December 12, 2024, the Court of Justice of the European Union issued a ruling in case C-331/23 concerning Value Added Tax (VAT).
Author:
Łukasz Kaza
TAX Assistant
Łukasz Kempa
Head of Tax Advisory, Tax Advisor

The CJEU held that EU law allows member states to introduce regulations that may impose liability for VAT payment on a person other than the taxpayer if necessary to secure tax revenues.

What was the case about?

A business engaged in beverage sales was subjected to a tax investigation by the Belgian tax authority for VAT violations in 2011. The violations included the company’s organization of a system of issuing false invoices, where the goods listed on these invoices were not delivered to the clients mentioned but to other entities.

The company was ordered to pay outstanding VAT, including under joint liability and for VAT refunds based on incorrectly issued credit notes, fines for incorrect invoice notations, and failure to pay VAT. Parallel criminal proceedings were conducted concerning violations from 2012-2014. The court imposed a fine on the company for tax fraud and the use of false documents concerning VAT and income taxes, as well as for failing to report income for corporate income tax purposes and failing to report sales and VAT due on those sales, all with the intent of fraud or causing harm.

Before the appellate court, the entity argued that, according to CJEU case law, no one can be unconditionally held liable for another person's fraud, as this would violate the principle of proportionality. The referring court sought clarification from the CJEU on the compatibility of Belgian regulations with the VAT Directive, the principles of proportionality and VAT neutrality, and the "ne bis in idem" principle concerning the accumulation of administrative and criminal penalties.

CJEU Judgment

The CJEU examined whether national regulations can impose liability for VAT payment on persons other than the taxpayer (joint liability) without assessing their individual involvement in tax fraud. The Court ruled that the VAT Directive allows member states to deem a person jointly liable for VAT payment if, at the time of the transaction, they knew or should have known that the VAT due on that transaction or any prior or subsequent transaction would not be paid.

Member states may rely on presumptions, provided they are not formulated in a way that practically prevents or excessively burdens the taxpayer from refuting them. Businesses that take all possible measures to ensure their transactions are not part of a chain involving abuses or fraud should be able to rely on the legality of these transactions to free themselves from the risk of joint liability for VAT due by another taxpayer.

A taxpayer jointly liable for VAT payment may be required to pay the full amount of the tax independently, regardless of their degree of involvement in tax fraud, without considering their right to deduct VAT due or paid.

Important!

The ruling also stated that it does not prevent national regulations that allow for the accumulation of criminal and administrative penalties of a punitive nature imposed in separate proceedings for acts of the same type occurring in successive tax years, which are the subject of administrative punitive proceedings for one tax year and criminal proceedings for another.

VAT Audit – A Chance to avoid sanctions and accusations of involvement in tax fraud

Implications for Polish taxpayers:

  1. The ruling’s findings may apply to taxpayers required to pay VAT under Polish joint liability regulations. According to Article 105a of the VAT Act, a taxpayer to whom the delivery of goods listed in Annex 15 of the Act was made is jointly liable with the supplier for their tax arrears, in the part of the tax proportionally corresponding to the supply made to them if, at the time of the delivery, the taxpayer knew or had reasonable grounds to suspect that the entire VAT amount due on the supply or part thereof would not be paid to the tax office. Paragraph 2 of the same provision clarifies that such a situation occurs "if the circumstances accompanying the supply of goods or the conditions under which it was made deviated from the circumstances or conditions usually present in the trade of these goods, in particular if the price of the goods delivered to the taxpayer was unreasonably lower than their market value."
  2. The mechanism covers goods and services such as:
    • Metals:
      • Steel products, including bars, sheets, pipes, profiles.
      • Precious metals, such as gold, silver, or platinum.
    • Electronics:
      • Mobile phones, smartphones.
      • Computers, tablets.
      • Video game consoles.
    • Construction materials:
      • Concrete, cement, and gypsum products.
      • Structural steel.
      • Parts and accessories for plumbing and sanitary installations.
    • Waste and secondary raw materials:
      • Ferrous and non-ferrous metal waste.
      • Secondary raw materials, e.g., scrap metal.
    • Coal products:
      • Hard coal.
      • Briquettes and coal-based fuels.
    • Services:
      • Construction works, including those related to building, renovation, and modernization of buildings and structures.
      • Real estate-related services (in certain cases).
  1. The ruling states that a member state (including Poland) cannot impose joint liability on a person other than the taxpayer in all cases but only in situations where "at the time of the transaction, that person [the jointly liable entity instead of the taxpayer] knew or should have known that the VAT due on that transaction or any earlier or later transaction would not be paid."
  2. This means that for Polish entities potentially jointly liable for VAT (buyers of goods/services subject to joint liability), the last line of defense against joint liability may be implementing VAT audit procedures. Through these procedures, they can demonstrate that the buyer "did not know and could not have known" that the seller would not settle VAT.

What is VAT audit?

VAT Audit can be described as a set of actions a taxpayer should undertake, which will be assessed by tax officials in the context of VAT settlements related to business operations. Compliance with VAT audit procedures when transacting with counterparties is crucial for proper VAT settlements, allowing the taxpayer’s right to deduct input tax to be evaluated.

The Ministry of Finance has published a document titled "Methodology for Assessing the Conduct of VAT Audit by Buyers of Goods in Domestic Transactions" (hereinafter: Methodology). It applies to buyers of goods in domestic trade who have not committed VAT fraud and were unaware that the transaction in which they acquired the goods was intended to facilitate VAT fraud.

Why is VAT audit important?

According to the Methodology, the right to deduct input tax may be denied if the taxpayer has committed fraud or tax abuse. Denial may also occur if the taxpayer was aware or should have suspected that their transaction was related to VAT fraud. Therefore, it is crucial to assess whether the taxpayer followed VAT audit procedures when entering transactions, considering objective circumstances indicating potential tax law violations or fraud attempts.

In practice, taxpayers implement VAT audit procedures based on the methodology. A well-prepared procedure defines the actions a buyer should take to retain the right to deduct VAT and establishes a systematic path for undertaking them. To be effective, these actions should go beyond merely drafting a document for internal records and should include stages and actions such as:

  1. Internal procedure analysis
  2. Preparing a VAT audit procedure
  3. Recommendations and advice in case of risk factors detection
  4. Employee training

VAT audit

To protect against tax inspections, it is also advisable to assess the entity’s situation regarding VAT audit compliance by engaging specialists to conduct an audit and assist in implementing VAT audit procedures. The results of such an audit can provide valuable insights into whether implementing a VAT audit procedure is warranted.

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