Briefing document & Podcast: C-442/22 (P Sp. z o.o.) – Employee who issued empty invoice is responsible to report them

I. Executive Summary

This briefing document reviews the ECJ’s judgment in Case C‑442/22, P sp. z o.o. v Dyrektor Izby Administracji Skarbowej w Lublinie, delivered on 30 January 2024. The case addresses the critical question of who bears VAT liability under Article 203 of Directive 2006/112/EC (the VAT Directive) when an employee issues fake invoices showing VAT, using their employer’s identity without the employer’s knowledge or consent.

The ECJ ruled that, in such circumstances, the employee is generally considered the “person who enters the VAT” and is thus liable. However, this liability shifts to the employer if the taxable person (employer) “did not exercise the due diligence reasonably required to monitor the conduct of that employee.” This judgment underscores the paramount objective of preventing VAT fraud and imposes a significant duty of care on employers to supervise employees with invoicing responsibilities.

II. Case Background (C-442/22)

A. Parties and Factual Scenario: The case originated from a dispute in Poland involving Company P, a taxable person for VAT purposes operating a petrol station, and the Dyrektor Izby Administracji Skarbowej w Lublinie (Director of the Tax Administration Chamber, Lublin, the tax authority). An employee of Company P, identified as P.K., who managed the petrol station, was found to have issued 1,679 fake invoices between January 2010 and April 2014. These invoices indicated VAT amounts but did not reflect actual sales of goods. P.K. used Company P’s details, including its Tax Identification Number (TIN), without the company’s knowledge or consent. The purpose of this fraud was to allow the recipients of these invoices to fraudulently obtain VAT refunds, while the corresponding VAT was neither recorded in Company P’s accounts nor paid to the State budget.

B. Tax Authority’s Position and National Proceedings: The Polish tax authority held Company P liable for the VAT, arguing that the company “had not exercised the due diligence required to avoid the issuance of the invoices at issue.” They highlighted that P.K. had the ability to issue invoices outside the company’s computerised accounting system without approval, and the chair of the board was aware of invoicing without proper oversight. Consequently, the tax authority concluded that P.K. could not be considered a “third party” vis-à-vis Company P due to the lack of supervision and adequate organisation.

The case progressed through Polish administrative courts, ultimately reaching the Naczelny Sąd Administracyjny (Supreme Administrative Court), which noted two conflicting interpretations of Polish law (Article 108(1) of the Law on VAT, transposing Article 203 of the VAT Directive):

Interpretation 1: The employer is liable if the employee was entitled to issue invoices, implying the employer assumes the risks associated with its employees. This raised the question of whether liability is strict or fault-based.
Interpretation 2: An entity whose details were unlawfully appropriated is not the “issuer” and therefore not liable, emphasizing the literal wording of the provision.

Given this conflict, the Polish Supreme Administrative Court referred two questions to the ECJ for a preliminary ruling.

C. Questions Referred to the ECJ:

Who is the “person who enters the VAT” under Article 203 of the VAT Directive – the employer whose details were used or the employee who unlawfully used them?
Is the employer’s failure to exercise due diligence in supervising the employee relevant to this determination?

III. Legal Context

A. Relevant EU Law (VAT Directive 2006/112/EC):

Article 9: Defines a “taxable person” as “any person who, independently, carries out in any place any economic activity.”
Article 167: Establishes when the right of deduction arises.
Article 203: The central provision in question, stating: “VAT shall be payable by any person who enters the VAT on an invoice.”
Article 205: Allows Member States to provide for joint and several liability for VAT payment in certain situations, including those under Article 203.

B. Polish Law:

Article 108(1) of the Law on VAT: Transposes Article 203, providing: “If a legal person, an unincorporated organisational unit or a natural person issues an invoice in which the amount of tax is shown, he or she is obliged to pay that tax.”

C. Purpose of Article 203: The ECJ reiterated its settled case-law that Article 203 “seeks to eliminate the risk of loss of tax revenue which the right of deduction provided for in the VAT Directive might entail.” It applies “where VAT has been invoiced incorrectly and there is a risk of loss of tax revenue on account of the fact that the recipient of the invoice in question has a right to deduct such VAT.” (ECJ Judgment, para. 24).

IV. ECJ’s Reasoning and Key Findings

A. Scope of Article 203: The Court confirmed that Article 203 applies even in the absence of an actual taxable transaction, as long as there is a risk of tax revenue loss (e.g., through fraudulent deductions by invoice recipients). In the present case, the invoices were issued for fraudulent purposes, and there was a clear risk of budgetary loss.

B. Identifying the “Person Who Enters the VAT”:

The term “any person” in Article 203 is broad, meaning the person liable is not necessarily a taxable person under Article 9. A natural, non-taxable person (like an employee) can theoretically be subject to this obligation.
The ECJ emphasized the objective of preventing fraud and potential abuse, noting that “EU law cannot be relied on by individuals for abusive or fraudulent ends” (ECJ Judgment, para. 29).
Crucially, the Court stated that it “would be contrary to that objective to interpret Article 203… as meaning that the apparent issuer of a fraudulent invoice showing VAT… is the ‘person who enters the VAT’… when the apparent issuer acted in good faith and the tax authority is aware of the identity of the person who actually issued that fake invoice” (ECJ Judgment, para. 30).
Therefore, in cases where an employer acts in good faith and the actual fraudulent employee is known, the employee should be considered the “person who enters the VAT.”

C. The Critical Role of Due Diligence:

The ECJ established a duty of care for employers, drawing parallels with the duty of traders to avoid participation in VAT fraud. This duty applies particularly when an employee is responsible for issuing invoices in the employer’s name.
An employer “cannot be regarded as having acted in good faith if it failed to exercise the due diligence reasonably required to monitor the conduct of its employee” (ECJ Judgment, para. 35). This failure would mean the employer did not prevent the employee from using its identification details for fraudulent purposes.
In such a situation, the employee’s fraudulent conduct “may be imputed to the employer,” with the consequence that the employer “must be considered to be the person who entered the VAT on the invoices at issue within the meaning of Article 203” (ECJ Judgment, para. 35).
The determination of whether due diligence was exercised requires “an overall assessment of all the relevant information” by the tax authority or court.

V. ECJ’s Ruling

The Court ruled:

“Article 203 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax

must be interpreted as meaning that, where an employee of a taxable person for value added tax (VAT) purposes has issued a fake invoice showing VAT using the employer’s identity as a taxable person, without that employer’s knowledge or consent, that employee must be considered to be the person who enters the VAT, within the meaning of Article 203, unless that taxable person did not exercise the due diligence reasonably required to monitor the conduct of that employee.”

VI. Implications and Significance

This judgment has significant implications for businesses and tax authorities across the EU:

Employer Liability Conditional on Due Diligence: The ECJ clarifies that an employer is not automatically liable for an employee’s fraudulent invoicing, even if their details are used. However, this protection is contingent on the employer demonstrating “due diligence reasonably required” in supervising their employees.
Emphasis on Fraud Prevention: The ruling reinforces the EU’s commitment to preventing VAT fraud, even when it originates internally within a company. The “good faith” of the employer is paramount, but it is not presumed if due diligence is lacking.
Burden of Proof: While not explicitly stated as a burden of proof, the ruling implies that tax authorities will scrutinize employer’s supervisory practices. Employers may need to demonstrate robust internal controls and monitoring mechanisms to avoid liability.
Practical Impact for Businesses: Companies must review and strengthen their internal procedures for invoice issuance, employee oversight, and financial controls, especially for employees with access to invoicing systems or company identification details. Failure to do so could result in significant VAT liabilities for fraudulent actions perpetrated by their staff.
National Courts’ Role: National courts and tax authorities will need to conduct a thorough “overall assessment of all the relevant information” (ECJ Judgment, para. 36) to determine whether an employer met the required standard of due diligence.

Latest Posts in "European Union"

Briefing document & Podcast: C-442/22 (P Sp. z o.o.) – Employee who issued empty invoice is responsible to report them

Latest Posts in "European Union"

Advertisements:

Contact:

Support & Info

Sign up for our newsletter