Joint and several liability for supplies without tax documents in customer-supplier relations
The Court of Justice of the European Union (CJEU) has dealt with the joint and several liability of individual entities in a chain of transactions in the event of tax evasion. The CJEU answered the question of whether it is right to hold companies that allowed fraud liable for tax unpaid by their ‘customers’. It concluded that joint and several liability was appropriate in the present case.
Dranken, a Belgian drinks retailer, had an elaborate system of issuing false tax documents and at the same time selling goods without tax documents: the company issued invoices to customers to whom they did not supply goods and, in turn, supplied goods to other entities - cafés and hotels - without invoices. The tax authorities therefore accused the company of de facto allowing the cafés and hotels to sell drinks 'on the black market' to avoid paying tax.
Belgian legislation provides that each taxable person is jointly and severally liable for the payment of the tax if they knew or should have known that the tax would be deliberately not paid in the chain of transactions. The penalty in such a case is twice the amount of the evaded tax.
The importance of vetting a business partner
The CJEU then dealt with the issue whether such a principle of objective joint and several liability is compatible with EU law (in particular the VAT Directive) and whether the persons jointly and severally liable for the tax should be allowed to deduct input VAT.
The CJEU first reiterated that the principle of proportionality requires that a member state’s measures shall not go beyond what is necessary to protect public budgets. In other words, measures designed to protect public money must not be excessive.
As for joint and several liability, the CJEU concluded that it is permissible where the recipient knew or should have known of the intentional non-payment of tax, provided that such a presumption is rebuttable. This means that the taxpayer may prove that they did everything they could to avoid the fraud, without such proof being too difficult or impossible for them to obtain.
The CJEU also stated that if someone is involved in fraud, they cannot claim input VAT deductions. In the case at hand, the CJEU ruled that if Dranken knew or should have known that the tax would not be paid, they could be held liable for the non-payment of the VAT.
The judgment shows the importance of caution and the thorough vetting of business partners. This prevents the unwitting involvement in potential tax fraud.