Fraudulent VAT invoices issued in a business' name

The CJEU has held that a business will not normally be liable to pay VAT shown on a VAT invoice fraudulently issued by one of its employees in its name, unless the business failed to exercise the due diligence reasonably required to monitor the conduct of the employee: P sp. z o.o. v Dyrektor Izby Administracji Skarbowej w Lublinie (Case C‑442/22).

The decision indicates that businesses should have in place due diligence procedures to ensure that the conduct of those employees in positions of responsibility is properly monitored.

Background

The case involved a Polish company, P, that operated petrol stations. One of its employees, PK, the manager of a petrol station, used the information it had on P (including valid invoices issued) to create false VAT invoices in P's name. PK then sold those false VAT invoices to other businesses which were able to claim input VAT on the basis of those invoices (without having incurred the relevant payments).

The Polish tax authority eventually uncovered the fraud and sought to recover the amounts fraudulently claimed as input VAT by businesses which had purchased the invoices. However, it was not in practice able to recover all of those amounts and so sought to recover the remainder from P as the ostensible issuer of the invoices on the basis of the requirement in Article 203 of the Principal VAT Directive that VAT should be paid by any person that enters VAT on an invoice. P appealed and the matter was referred to the CJEU.

The AG opined that it would only be where the business had shown a lack of good faith that it could be held responsible for VAT shown on false invoices issued in its name.

CJEU decision

The CJEU noted that Article 203 is intended to counter the risk of an unjustified deduction by the recipient of an invoice by imposing a corresponding debt on the issuer of the invoice. That was, in principle, the situation in the current case.

Article 203 provides that VAT shall be payable by any person who enters the VAT on the invoice. The CJEU noted that the term "any person" indicates that the person subject to the obligation to pay the VAT need not be a taxable person. A natural non-taxable person may, therefore, theoretically be subject to the obligation. Indeed, the Court has held that it would be contrary to the purposes of EU law to treat the apparent issuer of a fraudulent VAT invoice showing VAT as "the person who enters the VAT" on the invoice, where their identity has been appropriated by another, they acted in good faith and the tax authority is aware of the person who actually issued the fake invoice. In that situation, it is the actual person (the employee in this case) who entered the VAT that is "the person who enters the VAT" for the purposes of Article 203.

What of the argument that the employer had failed to exercise the due diligence required to prevent the issuance of fraudulent invoices? On this issue, the Court noted that it is not contrary to EU law to require a trader to take every step which could reasonably be required to satisfy themselves that the transaction does not result in their participation in VAT fraud. As such, where there are indications pointing to fraud, a reasonable trader may, depending on the circumstances, be obliged to make enquiries to ascertain there is no fraud. A similar duty of care must be owed by an employer to its employees, in particular when that employee is responsible for issuing VAT invoices in the name of the employer, for the purposes of Article 203. Therefore, an employer cannot be regarded as having acted in good faith if it failed to exercise the due diligence reasonably required of it to monitor the conduct of its employee and, in so doing, prevent the latter 1 from issuing fake invoices. In those circumstances, the employee's fraudulent conduct may be imputed to the employer such that it is seen as the person who entered the VAT on the invoice.

Comment

The decision seeks hard to strike a balance between entirely relieving a taxable person of any responsibility in such cases (where it is equally in some ways the victim of the fraud) and (leaning on cases such as Kittel) suggesting there may be some cases where it should be responsible for tax losses where it failed to correctly supervise its employees.

However, it is notable that, unlike the Kittel line of cases, P is not seeking any advantage or even any involvement in the matters covered by the false invoices and fraud in this case. As such, the decision appears to extend the existing jurisprudence concerning VAT fraud and the responsibilities of businesses in this regard. Indeed, the CJEU's decision means that  businesses will need to review their processes to ensure that they would have a defensible position if challenged by tax authorities.

It should be noted that some jurisdictions, such as the UK, have in place quite separate rules involving offences for the failure to prevent fraud or the failure to prevent the facilitation of tax evasion. Arguably, these are more appropriate methods to penalise supervisory failures in relation to the activities of others with whom a business has a connection, rather than via an extension of the VAT system.