Buying from a fraudster and VAT - everything you need to know
Entrepreneurs make many purchases of goods and services from various entities. Unfortunately, not everyone conducts legitimate business and a reliable entrepreneur is often exposed to contacts with dishonest persons. Naturally, not every entrepreneur is aware that he is dealing with a fraudster. In the context of the right to deduct VAT, the question arises whether purchases made from an unreliable entrepreneur definitely deprive the taxpayer of the possibility to deduct the tax. Check, purchase from a fraudster and VAT!
Basic principle of the deduction of VAT
The fundamental principle of value added tax is the right to deduct input tax included in the price of purchased goods and services. This principle is expressed in Art. 86 sec. 1 of the VAT Act, which provides that to the extent that goods and services are used to perform taxable activities, an active VAT payer has the right to reduce the amount of tax due by the amount of input tax.
The VAT Act, however, provides for several circumstances excluding the right to deduct input tax. As indicated in Art. 88 sec. 3a point 1 lit. a) of the VAT Act, they do not constitute the basis for the reduction of the tax due and the return of the tax difference or the return of the input tax, invoices and customs documents in the event that the sale has been documented with invoices or corrective invoices issued by a non-existent entity.
Tax authorities generally recognize that the concept of a non-existent entity also refers to an entity not registered for VAT purposes or removed from the register of active VAT payers. On this basis, the tax authorities repeatedly refused the right to deduct VAT from an invoice issued by a non-existent entity.
Purchase from a fraudster and VAT - the position of administrative courts
However, it should be pointed out that the matter is not so obvious. It should be noted that the Court of Justice of the European Union has repeatedly held the position that nothing prevents deducting the input tax from an invoice issued by a contractor deleted from the VAT register, if it actually exists and the invoice reflects the course of real economic events. Invoices from an existing contractor, even if he was removed from the VAT register after the service or delivery of goods, give the right to deduct. An important condition, however, is that the recipient of the invoice (the buyer of the goods) could prove that, despite exercising due diligence, he did not know and could not know that a specific sale is made by a dishonest taxpayer.
For example, the CJEU in its judgment of 22 December 2010, C-438/09, confirmed that:
"(...) the mere fact of not registering a contractor for VAT purposes in a situation where there is no doubt as to the actual performance of a service or delivery of goods, cannot constitute a basis for limiting the right to deduct input VAT. Failure to register one taxpayer may not undermine the right to the other taxpayer the right to deduct. (...) "
Similarly, the CJEU in its judgment of 22 October 2015, in case C-277/14, stated that:
"(...) the tax authorities may not deny the taxpayer the right to deduct the value added tax due or paid on the goods delivered to him due to the fact that the invoice was issued by an entity which, in the light of the criteria provided for by these provisions, should be considered an entity non-existent and it is not possible to identify the actual supplier of the goods, unless it is shown, in the light of objective conditions and without requiring the taxpayer to make arrangements to which he is not obliged, that the taxpayer knew or should have known that the supply in question was dealing with the value added tax offense. (...) "
The above rule applies to both unregistered contractors and contractors removed from the VAT register by decision of the competent tax authority. This was confirmed by the CJEU in the judgment of 19 October 2017, C-101/16. In the justification, the judges stated that the tax authorities should not refuse the right to deduct VAT from invoices issued by contractors deleted from this register. Registration is a formal condition, and failure to meet the formal conditions may not deprive the taxpayer of the right to deduct VAT, especially when the transaction took place and was made on the terms specified in the invoice.
Does due diligence entitle to a VAT deduction?
Problems of an interpretative nature are raised by a proper understanding of the due diligence requirement. Demonstrating its existence in the course of a transaction with a dishonest contractor is very important as it gives the right to exercise the right to deduct VAT due to the fact that a reliable taxpayer did not know and in objective circumstances could not know that he is dealing with a fraudster.
The answers to the doubts that arose were to be found in the available judicial decisions, but there was no official position on the part of the Ministry of Finance regarding the purchase from a fraudster and VAT. As a response to the need to clarify the due diligence condition, on April 25, 2018, the Ministry of Finance published a document called "Methodology for assessing due diligence by buyers of goods in domestic transactions". This study contains guidelines for assessing whether the taxpayer has exercised due diligence in the course of transactions with a dishonest contractor and, therefore, may retain the right to deduct input tax.
The developed "Methodology ..." is not a general interpretation. According to the intention of the Ministry of Finance, it is addressed to the tax authorities for use during tax audits, however, there are no reasons why it should be a reliable source of information also for the taxpayers themselves. Although the "Methodology ..." does not provide certainty as to the maintenance of the right to deduct input tax, compliance with the guidelines contained therein will certainly increase the likelihood of tax authorities recognizing that the condition of due diligence has been respected.
The lack of due diligence may be stated when the taxpayer has undertaken cooperation with a contractor who, inter alia:
- has not been registered in the National Court Register or in the Central Register and Information on Economic Activity - provided that, in the case of a given supplier, registration in the National Court Register or CEIDG is required; in the case of foreign contractors, it would be advisable to obtain a document corresponding to an excerpt from the National Court Register or CEIDG, in accordance with the legislation of the country of the contractor's seat;
- was not registered as an active VAT taxpayer - the buyer can verify this using the "Checking the status of the VAT entity" service available on the Tax Portal of the Ministry of Finance or by submitting an application to the competent tax office;
- proposes cash payment or offers a discount for this purpose, so that the price is reduced to a level not exceeding PLN 15,000;
- proposes that the transfer of receivables should be made to two separate bank accounts (apart from the split payment mechanism), to an account of a third party or to a foreign account;
- does not want the transaction to be documented by an agreement, order or other confirmation of its terms;
- does not have organizational and technical facilities appropriate to the type and scale of business activity.