Flashback on ECJ Cases C-324/11 (Tóth) – Right to deduct VAT if the business operator’s licence of the issuer of the invoice had been withdrawn

On September 6, 2012, the ECJ issued its decision in the case C-324/11 ( Tóth).

Context: Taxation – VAT – Directive 2006/112/EC – Article 9 – Meaning of taxable person – Right to deduct – Refusal – Principle of tax neutrality – Issuer of the invoice removed from the business register – Issuer of the invoice having failed to declare his employees to the tax authority – Obligation of the taxable person to satisfy himself as to the propriety of the conduct of the issuer of that invoice vis-à-vis the tax authority

Article in the EU VAT Directive

Article 9 of the EU VAT Directibe 2006/112/EU

Article 9 (Taxable person)
1. “Taxable person” shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.
Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as “economic activity”. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.
2. In addition to the persons referred to in paragraph 1, any person who, on an occasional basis, supplies a new means of transport, which is dispatched or transported to the customer by the vendor or the customer, or on behalf of the vendor or the customer, to a destination outside the territory of a Member State but within the territory of the Community, shall be regarded as a taxable person.

Facts

In 2007, Mr Tóth undertook building work for taxable persons partly using subcontractors, inter alia, an individual contractor, M.L. The contracts concluded between the latter and Mr Tóth imposed the obligation on the subcontractor to keep a record of works and to issue a certificate of completion of works. According to the records of works, M.L. employed 8 to 14 workers for the works. The certification of the works took place at the time of delivery by Mr Tóth to his customers. M.L. had issued 20 invoices in respect of the works in question, which had been accepted by Mr Tóth and appeared in his accounts and his tax return. Mr Tóth maintains that he paid the invoices in cash.
M.L. had not complied with his tax obligations since 2003, nor had he declared his employees to the tax authority as either permanent or temporary workers. By a final decision taken on 20 June 2007, the competent municipal authority revoked M.L.’s licence to operate as an individual contractor.
The tax authority ordered Mr Tóth to pay additional VAT totalling HUF 5 600 000 for the year 2007, on the ground that the tax included in the invoices issued by M.L. could not be deducted, because, as from 20 June 2007, the latter had ceased to be a taxable person and from that date could therefore not issue valid invoices. In addition, some of the invoices issued by M.L. bore an earlier date than that on the counterfoil invoice book from which they were taken, namely 7 September 2007. Finally, Mr Tóth had failed to ascertain the capacity in which the persons who had in fact carried out the works were present on the work site.
Following a complaint by Mr Tóth against that decision, it was confirmed by a decision of 8 January 2010 of the respondent in the main proceedings. The latter took the view that, when 16 of the 20 invoices were issued, the issuer, M.L., was no longer a taxable person and, therefore, had no right to pass on the tax. The fact that, during the tax year in question, M.L.’s tax identification number had not been removed from the tax authority’s register was irrelevant in that regard.
The Nógrád Megyei Bíróság (Regional Court, Nógrád) dismissed the action filed by Mr Tóth against the decision of the respondent in the main proceedings by a decision of 9 June 2010. The grounds of that decision were that on 20 June 2007 M.L. had lost the status of taxable person and, consequently, any right to pass on the tax. In relation to the invoices issued by M.L. before that date, the Regional Court stated that M.L. had no declared or temporary workers and that, therefore, it had not been proved that he had carried out the works. Moreover, Mr Tóth had not verified whether the service indicated on the invoice had been actually provided by the issuer, nor whether those who had worked on the work site formed part of the workforce or were temporary workers of M.L.
Mr Tóth brought an appeal against the decision of the Nógrád Megyei Bíróság before the referring court. That court doubts first, whether the right to deduct can be limited by reason of the fact that the issuer of the invoice had been removed from the business register. Second, that court raises the question whether it is possible to consider that Mr Tóth knew or ought to have known that he was participating in a transaction connected with fraudulent evasion of VAT within the meaning of paragraph 59 of the judgment in Joined Cases C‑439/04 and C‑440/04 Kittel and Recolta Recycling [2006] ECR I‑6161, given that he did not endeavour to verify whether a legal relationship existed between the persons carrying out the works and the issuer of the invoices.

Questions

1. Is the principle of tax neutrality (Article 9 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax) infringed by a legal interpretation which prevents the addressee of an invoice from exercising his right to deduct where the operator who issued it has, prior to full performance of the contract or issue of the invoice, had his business operator’s licence withdrawn by the municipal authority?

2. Can the fact that the individual operator who issued the invoice has not declared the workers whom he employs (who, as a result, work ‘in the black economy’), and the fact that, for that reason, the tax authority has found that the said operator ‘has no declared workers’, prevent the addressee of that invoice from exercising the right to deduct, having regard to the principle of tax neutrality?

3. Can it be held that the addressee of the invoice is guilty of a lack of care when he does not verify either whether a legal relationship exists between the workers employed on a work site and the issuer of the invoice or whether the latter has fulfilled his tax-return obligations or any other obligations relating to those workers? Can it be held that such conduct constitutes an objective factor which demonstrates that the addressee of the invoice knew or ought to have known that he was participating in a transaction involving fraudulent evasion of VAT?

4. Having regard to the principle of tax neutrality, can the national court take the above circumstances into consideration when its overall assessment leads it to the conclusion that the economic transaction did not take place between the persons specified on the invoice?

AG Opinion

None

Decision

1. Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax and the principle of tax neutrality must be interpreted as meaning that they preclude the tax authority from refusing a taxable person the right to deduct value added tax due or paid for services provided to him solely on the ground that the business operator’s licence of the issuer of the invoice had been withdrawn before he provided the services in question or issued the invoice for them, where that invoice contains all the information required by Article 226 of that directive, in particular the information necessary to identify the person who drew up the invoice and the nature of the services supplied.

2. Directive 2006/112 must be interpreted as meaning that it precludes the tax authority from refusing a taxable person the right to deduct value added tax due or paid for services provided to him on the ground that the issuer of the invoice relating to those services did not declare the workers he employed, without that authority establishing, on the basis of objective evidence, that the taxable person concerned knew, or ought to have known, that the transaction relied on as a basis for the right to deduct was connected with fraud committed by the issuer of the invoice or by another trader acting earlier in the chain of supply.

3. Directive 2006/112 must be interpreted as meaning that the fact that a taxable person did not verify either whether a legal relationship existed between the workers employed on a work site and the issuer of the invoice or whether the latter had declared those workers does not constitute an objective factor which demonstrates that the addressee of the invoice knew or ought to have known that he was participating in a transaction involving fraudulent evasion of value added tax, where the addressee was not in possession of any material justifying the suspicion that irregularities or fraud had been committed within that invoice issuer’s sphere of activity. Accordingly, the right to deduct may not be refused on that ground where the material and formal conditions laid down by that directive for the exercise of that right are met.

4. Where the tax authority provides specific evidence of the existence of fraud, Directive 2006/112 and the principle of tax neutrality do not preclude the national court from verifying, on the basis of an overall examination of the circumstances of the case, whether the issuer of the invoice carried out the transaction in question himself. However, in a situation such as that at issue in the main proceedings, the right to deduct may be refused only where it is established by the tax authority, on the basis of objective evidence, that the addressee of the invoice knew or should have known that the transaction relied on as a basis for the right to deduct was connected with a fraud committed by the issuer or another operator supplying inputs in the chain of supply.

Summary

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