SAC: liability for unpaid VAT not to take precedence over denying an entitlement to VAT deduction

The Supreme Administrative Court (SAC) in its recent judgement held that (customer’s) liability for VAT unpaid by the supplier does not universally take precedence over denying (the customer’s) entitlement to VAT deduction – which has undesirable consequences in the form of default (late payment) interest and penalty. The tax administrator may deny the entitlement even where the conditions for invoking liability are met.

While it may seem that both of the above concepts are alternative tools to fight tax fraud, the SAC clearly indicated that they are not to be viewed in this way. The conditions for invoking the liability for unpaid tax and those for denying the entitlement to VAT deduction on the grounds of involvement in tax fraud may be similar. Yet, each of the two concepts has its place in a different stage of tax proceedings: denying the entitlement for VAT deduction by its nature belongs to the assessment stage when the tax is being determined; on the other hand, the liability for unpaid tax only comes at the point when the tax has already been determined and is payable, but cannot be recovered from the taxpayer who was supposed to pay it.

According to the SAC, the tax administration cannot apply the liability concept in a tax inspection instead of denying the entitlement to deduct VAT, as in that stage of the tax proceedings, the tax has not yet been conclusively and finally assessed (or additionally assessed). If, having ascertained a knowing involvement in tax fraud, the tax administrator closes the tax inspection without issuing a finding, such an approach would not be in accordance with law or established court decision-making practice. The SAC thus refuses the idea previously voiced by the Regional Court in Ostrava that liability for tax takes precedence over denying the entitlement to deduction; on this basis, the Ostrava court refused additional tax being assessed as a result of denied entitlement to VAT deduction.

The SAC is clearly opposed to the idea of the liability for unpaid VAT being a universal tool to fight tax fraud. Taxpayers’ hopes for tax administrators’ milder sanctions in cases where their involvement in a fraudulent chain of transactions is ascertained in a tax inspection have thus faded.

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