The CJEU in the judgment issued on 15 April 2021 indicates that penalties concerning irregularities in VAT settlements must take into account of all the circumstances of the case. They cannot be applied where it is impossible to estimate the negative effects of an action and without verifying the intentions of the taxpayer. Penalties are intended to prevent fraud and tax offences, and therefore cannot be an expression of oppressive treatment of entrepreneurs by the state authorities.
Penalty imposing a 20 percent penalty on a VAT taxpayer
On 15 April 2021, the CJEU issued an important judgment in the case of Grupa Warzywna sp. z o.o., Case No. C-935/19. The subject of the court’s decision was whether imposing on a taxpayer an additional tax liability of 20% of the amount of understatement of tax liability is compliant with the VAT Directive 2006/112/EC and the principle of proportionality. This sanction is mentioned in Article 112b (2) of the VAT Act. The referring court doubted whether the imposition of penalties by the tax authorities automatically, without the possibility of assessing the consequences of the infringement and the intention of the taxable person, is compatible with EU law. In the present case, there was no loss of tax revenue.
The taxpayer did not act with tax fraudulent intent
In the present case, the taxpayer Grupa Warzywna sp. z o. o. purchased a property, determining the price in gross amounts, including VAT. As a result of a tax inspection it turned out that the parties to the transaction mistakenly qualified the transaction as taxable, while it was exempt from taxation. In the absence of a declaration made by the parties to the transaction waiving the tax exemption, the tax authority decided that the taxpayer was not entitled to request a VAT refund in the amount initially declared.
In order to correct the irregularity, the entrepreneur submitted a correction to the declaration, but the tax authority imposed a sanction on him in the amount of 20% of the understatement of tax liability. The referring court found that the penalty was oppressive rather than preventive in nature, as it did not in fact take into account the nature and gravity of the infringement and the fact that the State Treasury had not suffered a loss of tax revenue. The evidence on record also shows that the taxpayer did not act with the intention of committing tax fraud.
Fines for crimes, not for mistakes
The CJEU has fully endorsed the position that the aforementioned penalty is incompatible with the VAT Directive. Member States may impose penalties on taxpayers for errors made in settling tax in order to ensure the correct collection of VAT and to prevent tax fraud. However, in order to assess whether the penalty complies with the principle of proportionality, account must be taken, in particular, of the nature and seriousness of the infringement which the penalty is intended to punish. The automatic application of administrative penalties in all cases of understatement of VAT or overstatement of VAT refunds is an inadequate means of achieving the objective of combating tax fraud.
The obligation to adapt the amount of the penalty to the offence
The irregularity in VAT settlement in the main proceedings was caused by an error of assessment by the parties to the transaction as to the taxability of the supply. This error did not indicate an intention to commit fraud and, in addition, it did not result in a depletion of tax debts. Consequently, the tax authorities had no possibility to adjust the amount of the sanction to the specific circumstances of the case. The lack of the possibility to individualise the penalty imposed on the taxpayer is contrary to the objective of ensuring the correct collection of taxes and preventing tax fraud. Consequently, it is incompatible with the principle of proportionality of VAT and the provisions of the directive.
The CJEU decision as a basis for repealing decisions already issued
The position of the Court is favourable for companies in Poland. The Court indicated that member states have the right to impose administrative sanctions on taxpayers in the event of irregularities in VAT settlements. However, the provisions determining the manner in which such penalties are imposed must comply with EU law and its general principles, and thus with the principle of proportionality. Tax authorities should have the possibility to adapt the amount of the sanction to the specific circumstances of each case. The judgment of the Court may be the basis for annulling tax decisions that have already been taken and for resuming proceedings that have ended with the determination of an additional tax liability.
Maciej Kozub, VAT Specialist