VAT fraud committed by employee: employer is not liable for VAT under certain conditions
On 30 January 2024, the European Court of Justice issued its judgment in the Polish case Dyrektor Izby Administracji Skarbowej w Lublinie (C-442/22).
An employee of a Polish company operating a petrol station issued fake invoices. The employee collected discarded payment receipts and created new invoices for the amounts of fuel indicated on those receipts. Those fraudulent VAT invoices were issued under the name of the company to entities who used those for unlawful deduction of input VAT.
The tax authorities issued a VAT claim against the company. They found that the company had failed to exercise due diligence in preventing the issuing of fraudulent invoices. Additionally, they stated that due to the lack of proper supervision and organization, the chair of the company’s board only discovered the practice in question after an audit had been conducted by the tax authority.
The company lodged an appeal against that judgment at the Supreme Administrative Court of Poland, who referred its questions to the European Court of Justice.
The point at issue in this case is about who is liable to pay the VAT on fraudulent invoices, when those invoices were issued by an employee without her employer’s knowledge and consent.
The liability to pay VAT on such fraudulent invoices follows from article 203 of the EU VAT Directive, which states that “VAT shall be payable by any person who enters the VAT on an invoice”.
Does ‘any person’ refer to the taxable person (the ostensible issuer – the company), or to the employee?
In that respect, the Court holds that VAT cannot be payable by the apparent issuer of a fake invoice where it is acting in good faith and the tax authorities are aware of the identity of the person who issued the invoice.
More specifically, the employer needs to exercise the due diligence reasonably required to monitor the conduct of its employee and, in so doing, prevent the latter from using its identification details as a taxable person for VAT purposes to issue fake invoices for fraudulent purposes.
The European Court of Justice refers to the national court with respect to this assessment. Only if it results from such assessment that the employer did exercise the due diligence reasonably required to monitor the conduct of that employee, that employee must be considered to be the person who is liable for the VAT for the application of article 203, instead of the employer.
This case demonstrates how important it is for businesses to put in place the necessary measures in order to prevent employees from committing fraud, in order to avoid liability for VAT due to such fraud.
