A company is responsible for its employee’s VAT fraud, even if it knew nothing about it. However, an entrepreneur can protect themselves from liability for team members’ crimes by implementing oversight over employee actions in the company, including accounting and legal oversight.
In a ruling of September 3, 2024, the Supreme Administrative Court acknowledged that a company is liable for its employee’s VAT fraud even if it knew nothing about it. According to the court, it should organize and supervise work in such a way that it can detect such irregularities. This court decision means that entrepreneurs should implement oversight, including accounting and legal, over employee actions in their workplaces if they do not want to be liable for fraud committed by them.
The issuer of the invoice is obliged to pay tax
Fundamentally, everyone is responsible for their actions, but as far as business operations go, the employer may also bear responsibility for their employees’ actions. Under Art. 108 paragraph 1 of the Goods and Services Tax Act, the issuer of an invoice is required to pay the tax shown on it. Tax authorities seek the VAT payment from the company listed as the issuer. They do not ask whether the company knew about the creation of the document or not.
High penalties for so-called blank invoices
If irregularities are revealed after the VAT settlement deadline for a given period, entrepreneurs have to pay penalty interest on top of settling the overdue tax. If the company’s activities are deemed fraudulent (under Art. 56 of the Fiscal Penal Code) or VAT fraud (Art. 76 of the FPC), it may face a fine of up to PLN 41 million in 2024 (720 daily rates) or imprisonment, or both penalties jointly. Moreover, invoice forgery is penalized by the Criminal Code. According to its Art. 271a, such an offence may result in imprisonment from six months to up to 20 years. Thus, the assignment of blame for issuing unreliable invoices can be an important matter for entrepreneurs.
Question to the CJEU
In mid-2022, the Supreme Administrative Court asked the Court of Justice of the EU whether in case an employee issues a fictitious invoice with the employer’s data but without the latter’s knowledge and consent, should the employee or the employer be liable for the VAT payment. And should it matter whether the employer had duly supervised the employee in answering this question?
Fictitious invoices issued by the employee
The case before the Supreme Administrative Court involved a limited liability company running a petrol station. Since 2005, it was managed by an employed manager. The tax inspection revealed that between 2010 and 2014, the company issued 1679 so-called blank invoices, which did not reflect actual sales of goods. The VAT defrauded, i.e., state budget shortages, amounted to nearly PLN 1.5 million.
The scheme involved the manager collecting real receipts issued by the employees to the customers who did not take them. She then attached them to invoices issued to VAT taxpayers. These taxpayers included the invoices in their companies’ VAT settlements, thus reducing their goods and services tax liabilities. As the company explained, the procedure was not easy to detect as the invoices reflected authentic receipts corresponding to actual sales. Moreover, the disputed documents were registered in the petrol station system in a different format from the company’s accurate invoices, and access to them was possible only through unlocking the manager’s computer.
Companies must be alert if they are not to be liable for an employee’s fraud
Both, the head of the tax office and the Voivodship Administrative Court in Lublin decided that the company did not take the necessary steps that would have prevented the issuance of the disputed invoices, and therefore it should bear the responsibility (case file I SA/Lu 987/17). In response to the question directed at this case, the Court of Justice ruled on January 30, 2024, that such liability could only be attributed to the employer under the condition of demonstrating that it had not exercised due diligence, reasonably required to control its employee’s actions. The CJEU pointed to the Tribunal’s established line of decisions, which requires for an economic entity to undertake all feasible measures to ensure that its transaction does not lead to participating in VAT fraud (case C-442/22, P. sp. z o.o. vs the Director of the Tax Administration Chamber in Lublin).
Employer needs to exercise due diligence in supervision
On the basis of the above decision, on September 3, the Supreme Administrative Court adjudicated the company’s case ruling that it bears VAT liability under Art. 108 paragraph 1 of the Goods and Services Tax Act. As reported by Business Insider[i], the court stated that the company had not exercised due diligence in supervising its employee, given the long-lasting criminal procedure (over three years). During this time, the manager’s computer was not subject to any controls. If an employer empowers its employee to issue invoices on its behalf, it should ensure a proper system to monitor the compliance of the process (case file I FSK 1212/18).
How can companies protect themselves?
First, implementing measures to supervise employees, especially in such critical areas as finance, sales, or accounting, is crucial. The Supreme Administrative Court suggests internal control procedures, carried out by a specialized employee, or external control carried out by a professional external entity.
In the case of invoices and financial documents flow, entrusting accounting supervision to an external, specialized entity overseeing and correcting the internal accounting department is advisable. Another way is outsourcing accounting, i.e., entrusting the accounting service to an external partner. It is important that such an entity understands the client’s business well enough to identify potential vulnerabilities.
Apart from the above-mentioned measures, like constant or cyclical accounting oversight, or legal audit, it is also essential to develop precise work regulations in the company. Any possible measures ensuring the exercise of due diligence in supervising employees’ activities should be taken. In a virtually identical case, the Voivodship Administrative Court in Warsaw ruled that an employer could not be liable for the criminal actions of its subordinate, provided there was good faith on the employer’s side. In this case, the court recognized that the company had safety procedures, carried out internal audits, and informed law enforcement authorities about its suspicions regarding the employee’s criminal activities. Therefore, it could not be blamed for negligence in supervision (judgment of November 24, 2023, case file III SA/Wa 1058/23). Even the Supreme Administrative Court in other matters underlined that the liable one for the VAT payment from a blank invoice should be the one impersonating another entity (June 27, 2017, case file I FSK 1459/15). In the judgment of October 23, 2019, it pointed out that accepting another standpoint would lead to a situation in which every entrepreneur would be responsible for any unlawful use of freely available data about their company on the Internet. This would straightforwardly lead to those companies’ bankruptcy (case file I FSK 1037/17).
In case of questioning the exercise of due diligence in supervision, entrepreneurs can fight for their legal interest protection, both before authorities and in court. Every case should be considered individually, as the varied court decisions prove.
Author: Robert Nogacki, legal counsel, managing partner, Skarbiec Law Firm, specializing in legal, tax, and strategic consulting for entrepreneurs.
[i] “The employee cheated. Who is responsible for VAT, them, or the company? There is a surprising final verdict in a prominent case”, Business Insider, September 5, 2024.
Source: https://managerplus.pl/firma-odpowiada-za-oszustwa-vat-owskie-pracownika-tzw-puste-faktury-22363
