VAT fraud: limits to joint and several liability for tax debt

Article 205 of the VAT Directive empowers Member States, in the situations referred to in Articles 193 to 200 and Articles 202, 203 and 204, to provide that a person other than the person liable for payment of VAT is to be held jointly and severally liable for payment of VAT. Article 205 of the VAT Directive does not transfer the tax debt to another person, as is the case with Article 196 of the VAT Directive for example. It provides for a further person who is liable to pay tax, in addition to the taxable person. That payment obligation is imposed jointly and severally. However, it is linked to another person’s existing tax debt and is therefore ancillary in nature. It thus effectively establishes the liability of a third party for tax owed by another person. This issue has been addressed a few times by the Court (among others, ALTI, C-4/20).

If the purpose of Article 205 of the VAT Directive is to protect the rights of the public exchequer as effectively as possible by making another person liable on an ancillary basis for the taxable person’s tax debt, then that depends on the tax debt (principal debt) being established and therefore capable of being assessed. That condition is not satisfied in the present case, with the result that Article 205 of the VAT Directive cannot be applied. By contrast, Article 203 of the VAT Directive expressly provides that a tax debt is payable in respect of the VAT entered on false invoices.

Even though Article 205 of the VAT Directive restricts the possibilities for Member States to provide that another person is liable for payment of VAT to the VAT specifically owed by a specific person, it does not follow that it precludes further measures by the Member States in their national law of tax procedure. It may be that Article 273 of the VAT Directive allows for corresponding liability to attach to the taxable person. That provision allows Member States to impose other obligations to ensure the correct collection of VAT and to prevent tax evasion. ‘Extended liability’ on the part of the supplier for the merely presumed tax debts of a third party arising from untaxed resale, with a view to preventing tax evasion under the first paragraph of Article 273 of the VAT Directive, therefore is a possibility, if it is applied in a proportionate manner.

According to the Court’s case-law, for example, it is not contrary to European Union law to require a person other than the person liable to pay the tax to take every step which could reasonably be required of him or her to satisfy him or herself that the transaction which he or she is effecting does not result in his or her participation in tax evasion. (Vlaamse, C-499/10).

However, there is a certain tension between these statements and the Court’s case-law on an undertaking’s right to deduct input tax in the context of VAT fraud. According to that case-law, a taxable person who knew or should have known (Kittel, C-439/04) that he or she was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the VAT Directive, be regarded as a participant in that fraud. That obliges the Member States to refuse the taxable person (the applicant, in the present case) the right of deduction.

Under Article 273 of the VAT Directive, the Member States may adopt measures to ensure the correct collection of VAT and to prevent evasion. They must, however, exercise that power in compliance with EU law and its principles, inter alia the principles of proportionality and of VAT neutrality.

Thus, the penalties must not go beyond what is necessary to attain the objectives referred to in Article 273 of the VAT Directive and must not undermine the neutrality of that tax. In order to assess whether a penalty is consistent with the principle of proportionality, account must be taken of, inter alia, the nature and the degree of seriousness of the infringement which that penalty seeks to sanction, and of the means of establishing the amount of that penalty.

In the Dranken Van Eetvelde case, C-331/23, the Advocate General Juliane Kokott, in her opinions delivered on 5 September 2024, held that:

• Article 205 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, must be interpreted as permitting liability for third-party tax debts only where the person liable for payment and his or her tax debt are known. The liability for an unknown third party whose tax debt is merely estimated cannot be based on Article 205 of Directive 2006/112; at most, it may be based on Article 273 of that directive;
• Article 203 of Directive 2006/112, read in conjunction with Article 273 thereof and in conjunction with the principles of proportionality and VAT neutrality, must be interpreted as precluding national legislation under which VAT which has been improperly entered on invoices in the context of participation in VAT evasion committed by a third party, without the possibility of adjustment, is established in the form of secondary liability and supplemented – alongside the options offered by criminal law – by a fine of an additional 200% of the amount entered.