Employers beware! ECJ Case C-442/22 – employer’s VAT liability for employee’s fraud

Background

The Polish tax authorities found that, between January 2010 and April 2014, Company P had issued 1 679 invoices for the sale of fuel in a petrol station without paying the corresponding VAT to the state budget. It appeared that all of these invoices were falsely issued by the employee P.K. with no consent or knowledge of the employer, Company P.

The invoices were accompanied by authentic receipts, that were collected by other employees and delivered to P.K. against financial benefit. P.K sold the invoices to entities that fraudulently obtain VAT refunds.

The false invoices were recorded on the petrol station’s computer in a different format to that of the normal invoices of Company P and could not be consulted without unlocking that computer. The Polish tax authorities claimed that the responsibility for the payment of the VAT charged by these invoices was entirely on the employer Company P due to its lack of supervision of its employee.

Questions referred to the ECJ

Within the meaning of Article 203 of the VAT Directive that provides that VAT shall be payable by any person who enters the VAT on an invoice, in the particular case:

• Who needs to be considered liable for the VAT fraudulently shown in the invoices – the employer or the employee?
• Does the potential failure of the employer to exercise due diligence in supervising its employee affect this liability?

Key Points of the Case

• The VAT entered on an invoice is payable by the issuer of the invoice even in the absence of an actual taxable transaction.
• Liable for the VAT shown on the invoice may be taxable person but also a non-taxable person.
• In any case when there is a risk of loss of tax revenue, the issuer of the invoice is liable for the VAT indicated in the invoice irrespective of any fault. By contrast, if there is no such risk, Article 203 of the VAT Directive does not apply.
• An employer who failed to exercise the due diligence reasonably required to monitor the conduct of its employee must be considered the issuer who entered the VAT on the invoices and who is liable for the VAT.

Court’s Conclusion

Article 203 of the VAT Directive must be interpreted as follows: If an employee of a taxable person for VAT purposes has issued a fake invoice showing VAT using the employer’s identity without the employer’s knowledge or consent, that employee must be considered the person who enters the VAT. However, this responsibility shifts to the taxable person if it is determined that this taxable person did not exercise the due diligence reasonably required to monitor the conduct of its employee.

Significance

This ruling clarifies the interpretation of Article 203 of the VAT Directive in cases of fraudulent VAT invoices issued without the knowledge or consent of the person identified as an issuer. It emphasizes the importance of due diligence by taxable persons to prevent VAT fraud.

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