Fraud by employee - Is employer liable for VAT?

Introduction

Imagine this happening to you. An employee issues false invoices with VAT in the name and VAT number of the employer. The employer is not aware of this. Is the employer now obliged to pay VAT to the tax authorities? The answer to that is unfortunately yes. The Court of Justice has confirmed this in a new ruling (C-442/22). The employer is therefore liable for the actions of this employee. That can have far-reaching consequences. In the case that led to this ruling, the employer must (probably) still pay € 320,000 in VAT to the tax authorities. Please note, this VAT has never been received by the employer!

The case

The case is quite simple. It is a gas station. The employee at this gas station had (in short) collected receipts, which customers had thrown away after paying. Based on these discarded receipts, new (fraudulent) invoices were then drawn up showing the fuel, quantity and price of the original invoice. These new fraudulent invoices were then sold by the employee to interested parties. Based on these fraudulent invoices, the buyers could deduct VAT on fuel that was never delivered/purchased. This is also 'detrimental' to the treasury as the VAT is reclaimed from the tax authorities, but the VAT on the fraudulent invoices is not paid.

VAT system

To prevent these types of dangers to the treasury, a safety valve has been included in the VAT legislation (Article 37 Dutch VAT Act). Based on this article, the entrepreneur is obliged to pay the VAT, even if the VAT is incorrectly stated on an invoice. So, even if this VAT should not have been stated on the invoice at all. Such situations arise if, for example, there is a VAT-exempt activity, but 21% VAT is still charged. Or, the reduced rate (9%) applies and the standard rate (21%) is charged. This safety valve creates a balance for the treasury, namely payment of VAT by the seller and deduction of VAT by the buyer (even if the buyer is not entitled to do so). The entrepreneur does have options to correct this error later and to reclaim the incorrectly invoiced VAT from the tax authorities. This is only possible if it is established that the customer has not deducted the VAT or has corrected this deduction of VAT.

Does this system also apply if the employee commits fraud? The answer to this has been given in this ruling by the Court of Justice.

New element

The innovative aspect in this case is that the Court of Justice determines that in these types of situations the employee can also be held liable to pay the VAT to the tax authorities (even though they are private individuals and not entrepreneurs). Something we have not yet seen in the Netherlands. This is a refreshing look at the VAT system and, in our opinion, justified.

This does not alter the fact that the employer will initially be liable. According to the Court of Justice, this is the case if the employer has not exercised sufficient care. In this case, the employer is blamed for not having exercised sufficient supervision over the employee. According to the Court of Justice, this is all the more problematic now that the employee was also authorized to issue invoices outside the computer system (this was apparently a common practice), without requiring permission from the employer.

Practice

This ruling by the Court of Justice introduces a new rule. Namely, that an employee can be held directly accountable by the tax authorities for the payment of VAT in the event of fraudulent activities by this employee. The employer can therefore remain out of harm's way in these types of situations. This requires that the employer can demonstrate that he has exercised sufficient care. This requires specific controls on employee actions. This is a significant burden for the employer. This not only requires written documentation of control protocols, but also documenting the actual performance of these controls. If these processes are not in order, the employer cannot avoid additional VAT assessments, regardless of the fact that an employee has carried out these actions.

If you have any questions about this topic or if you would like to discuss the topic further, please do not hesitate to contact us at info@vatpartners.com