The war on VAT fraud is increasing. Entrepreneurs are trying to figure out what conditions they have to maintain in order to avoid negative consequences due to abuses committed by contractors. There are no simple prescriptions here that are always effective.
Judgment of the Supreme Administrative Court of 19 September 2017 reference no. I FSK 133/16 points out that the intent of fraud on the part of the taxpayer cannot be sought by force. It must be stressed that courts two instances (WSA in Łódź and NSA) took a position in favour of the entrepreneur and simultaneously denied the restrictive line of the tax authority.
Judgment of the Supreme Administrative Court of 19 September 2017 reference no. I FSK 133/16 points out that the intent of fraud on the part of the taxpayer cannot be sought by force. It must be stressed that courts two instances (WSA in Łódź and NSA) took a position in favour of the entrepreneur and simultaneously denied the restrictive line of the tax authority.
Appropriate care considered individually
The basic principle of the tax carousel (and other VAT abuses) is that it is not possible to charge the trader with negative financial consequences if he did not know – and he could not have known – about the tax abuse committed by the counterparty when exercising due care. However, each case is individual and tax authorities are not always understanding.
The case concerned an adverse decision of the tax authority which deprived the taxpayer of the right to deduct VAT. The reason was the tax abuse at an earlier stage of trading. The Authority argued that the taxpayer did not exercise due diligence in verifying the counterparty despite suspicious trading circumstances. The WSA in Łódź and then the NSA, however, considered that it was not necessary to exaggerate by seeking signs of fraud in every aspect of economic turnover.
The case dealt with a very sensitive issue, in a sense that was commonly associated with fraud, namely fuel trading. The entrepreneur purchased fuel at a price of approx. 20 pennies lower per litre than the market price. Moreover, all payments were made only in cash. The seller did not agree to any other form of payment.
The tax authority considered that such circumstances should raise suspicions by the trader. This, in turn, justifies denying him lack of due diligence and consequently losing his right to deduct VAT.
Consistent positions of WSA and NSA
WSA in Łódź accepted a completely different position, and in the same form then accepted it NSA. Consistent decisions of both instances contained several important also, which could be extremely beneficial for entrepreneurs in similar cases.
First of all, sanctions cannot be applied automatically and collectively to all parties in the transaction chain simply because VAT fraud has occurred at some stage. The condition is that the entrepreneur did not know or could not know about the irregularity on the part of another entity.
After second, if the taxable person suspects irregularities, he should seek information on the person from whom he intends to acquire the goods or services. In other words, he should be sure of the reliability of the counterparty.
The key conclusion is that businesses cannot be required to undertake verification activities comparable to those carried out by tax authorities:
„the tax authorities cannot generally require the taxable person wishing to exercise the right to deduct VAT to examine whether the issuer of the invoice for the goods or services to which the deduction is to be made is a taxable person, whether he has the goods in question and is able to deliver them, and whether the obligation to declare and pay VAT(...) is in principle to carry out the necessary checks on taxable persons in order to detect irregularities and infringements of VAT law.’
In the present case, the taxpayer verified the counterparty by checking the registration documents, such as decisions to assign NIP and REGON numbers, as well as a certificate of entry in the business records and the fuel traffic licence. The Court of First Instance pointed out that ‘the body underestimated these facts, while in other cases the absence of such activities of the taxpayer was regarded as aggravating circumstances’.
VAT fraud is more relative than it might seem. In addition to the obvious financial fraudsters, it is also possible to identify a group charged with taxation for "business negligence". Tax authorities are currently in a phase of extreme pressure to prosecute fraud. Some officials tend to look hard for fraud, which may pose a significant risk to the financial liquidity of some companies. However, the court rulings cited above indicate that the adverse decision of the tax authority does not necessarily mean failure.