ECJ on input VAT denial and statutory liability

Facts

FAU, a Czech company, purchased fuel from Verami, another Czech company. When it emerged that the trading chain was involved in tax fraud, the tax office denied FAU the right to deduct input VAT on the fuel purchased from Verami. In addition, the tax office held FAU liable for the VAT not paid by Verami after attempts to collect the VAT from Verami had failed. The authority based its decision on a national provision according to which the recipient of a supply is jointly and severally liable for VAT if, among other things, the supplier has not paid it and if payment for that supply is made in whole or in part by cashless transfer to an account opened by a payment service provider outside the Czech Republic.

The Czech court referred the question to the ECJ as to whether it was compatible with the principle of proportionality to hold the recipient liable in addition to refusing the right to deduct input VAT, so that FAU had to pay VAT on Verami's supply twice. It pointed out that, according to the interpretation of the Czech courts, the aforementioned liability provision may only be applied if there are additional circumstances which clearly indicate that the potential debtor knew or should have known that the payment made abroad was intended to evade tax. This was the case with FAU.

ECJ ruling

The ECJ first examined separately the admissibility of the statutory liability and the refusal of input VAT deduction and only then the admissibility of the combination of both measures.

Article 205 of the VAT Directive allows a person other than the supplier to be made liable for VAT in order to ensure the effective collection of VAT. However, the provision does not specify who the Member States may call upon or in which cases they may do so. It is therefore for the Member States to lay down the detailed rules, but they must do so in accordance with the principles of legal certainty and proportionality. The measures may aim to protect the claims of the State treasury as effectively as possible, but the principle of proportionality requires that they do not go beyond what is necessary to achieve that objective.

The ECJ refers to its earlier decision in the Dranken Van Eetvelde case (C-331/23), according to which the tax authorities have the right to hold a person liable who, at the time of the supply to them, knew or should have known that the VAT due on that or a previous or subsequent transaction would remain unpaid. In doing so, the authority may rely on presumptions, provided that these are not formulated in such a way as to make it practically impossible or excessively difficult for the person liable to rebut them.

The files do not show that FAU was deprived of the opportunity to prove that it had taken all measures that could reasonably be expected of it to ensure that its transactions did not form part of an abusive or fraudulent supply chain. In those circumstances, the tax office was entitled to hold FAU liable. The ECJ adds that FAU could seek recourse against Verami under Czech civil law. The fact that recourse is unlikely to be successful due to insolvency is irrelevant. If the tax authorities had to assess the prospects of success of a recourse claim, this would make the effective collection of VAT too difficult.

In a situation such as the present one, it is the duty of the tax office to deny the deduction of input VAT. This extensive refusal, given the knowledge or possible knowledge of Verami's involvement in tax evasion, is intended to encourage taxpayers to exercise the necessary care that can reasonably be expected in any economic transaction to ensure that the transactions carried out by the taxpayer do not lead to their participation in tax fraud.

FAU may be held liable regardless of the fact that it has already been denied the right to deduct input VAT. If liability were to be permitted only if the right to deduct input VAT existed, bona fide taxpayers would be disadvantaged compared to those acting in bad faith, because anyone who has the right to deduct input VAT must have been acting in good faith. The combination of both measures does not unjustifiably enrich the tax authorities, as it is limited to measures to obtain payment of the various amounts of VAT owed to them by both taxpayers. As a further reason for the simultaneous application of both measures, the ECJ states that the refusal of the right to deduct input VAT and the liability pursue different and complementary objectives, which are to combat tax fraud and ensure the effective collection of taxes by the State.

Valuation

The ECJ deliberately accepts the double burden of sales tax in this case. Whether this appears justified depends on your point of view. If you consider the output VAT paid by Verami and the input VAT deduction by FAU to be one and the same tax, double taxation can be regarded as contrary to the system. However, ECJ case law appears to tend toward excluding dishonest market participants from the system.

Author: Nadia Schulte