CJEU: liability for unpaid tax and denial of VAT deduction applied simultaneously

FAU had been buying fuel from Verami, while both companies were in bankruptcy. During a tax inspection, it was found that the chain of transactions in which both companies were involved was affected by tax fraud. FAU was ordered by the tax administrator to pay the VAT not paid by Verami, under its joint and several liability. Furthermore, FAU was denied the right to deduct VAT on the invoices received for the fuel because the chain of transactions was affected by VAT fraud.

According to the CJEU, FAU had not taken every measure to ensure that the transactions they had carried out were not part of an abusive or fraudulent chain. At the same time, the CJEU held that if a person jointly and severally liable (the supply recipient) pays the tax owed by the supplier, the supply recipient then can claim reimbursement of that amount from the supplier.

The CJEU emphasised that the denial of the right to deduct VAT paid by the supply recipient to the supplier is consistent with the VAT principles if the supply recipient knew or ought to have known that they were involved in tax evasion by the supply in question. Joint and several liability then arises irrespective of whether the customer has already paid the VAT invoiced by the supplier. It is therefore irrelevant whether the supply recipient has gained the right to deduct VAT.

The denial of the right to deduct VAT and joint and several liability pursue two distinct and complementary objectives. For the former, it is to combat tax fraud; for the latter, it is to ensure the effective collection of VAT for the public budget in a situation where a transaction is affected by tax fraud. Therefore, in the preset case, it was possible to apply both instruments independently of each other.