Flashback on ECJ Cases C-384/04 (Federation of Technological Industries and Others) – Jointly and severally liability of the payment of VAT

On May 11, 2006, the ECJ issued its decision in the case C-384/04 (Federation of Technological Industries and Others).

Context: Sixth VAT Directive – Articles 21(3) and 22(8) – National measures to combat fraud – Joint and several liability for the payment of VAT – Provision of security for VAT payable by another trader.

Article in the EU VAT Directive

Articles 21(3) and 22(8) of the Sixth VAT Directive (Articles 205 and 273 of the EU VAT Directive 2006/112/EC).

Article 205 (Persons liable for payment of VAT to the tax authorities)
In the situations referred to in Articles 193 to 200 and Articles 202, 203 and 204, Member States may provide that a person other than the person liable for payment of VAT is to be held jointly and severally liable for payment of VAT.

Article 273 (Miscellaneous provisions)
Member States may impose other obligations which they deem necessary to ensure the correct collection of VAT and to prevent evasion, subject to the requirement of equal treatment as between domestic transactions and transactions carried out between Member States by taxable persons and provided that such obligations do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers.
The option under the first paragraph may not be relied upon in order to impose additional invoicing obligations over and above those laid down in Chapter 3. ▼B

Facts

Sections 17 and 18 of the Finance Act 2003 were enacted to combat ‘missing trader’ intra-Community fraud, including ‘carousel’ fraud, in the field of VAT.
The Federation lodged an application for judicial review of those provisions, claiming in particular that they are not authorised by Community law.
That application was first considered by the High Court of Justice of England and Wales, Queen’s Bench Division (Administrative Court), and then, on appeal, by the Court of Appeal (England and Wales) (Civil Division).
The Court of Appeal observes that, according to the Commissioners, the type of fraud in question normally falls into one of the two categories mentioned in paragraph 7 above.
The first category is what the Commissioners term ‘acquisition fraud’. In essence, a business which is registered in the United Kingdom for VAT purposes – the ‘missing trader’ – imports goods from a European Union supplier and sells them on, generally, into the United Kingdom retail market either directly or through a wholesaler. The ‘missing trader’ then fails to pay the Commissioners the VAT due on its onward supply. This category may also cover the case of a trader purporting to represent an existing VAT-registered business, but which has no connection with the business in question (such a trader is often referred to as a trader using a ‘hijacked’ VAT number).
The second category is known as ‘carousel fraud’. This category takes its name from the way in which the same goods travel within the Union from one Member State to another and back again, without reaching an end‑user. In its simplest form, such fraud requires three VAT-registered traders in two different Member States, although, generally, there will be at least six or seven in two or more Member States.
The first part of this fraud functions in the same way as that described in paragraph 11 above. The ‘missing trader’ then sells the goods at a loss onto a buffer business which subsequently claims the VAT paid back from the Commissioners. This buffer business in turn resells the goods to another buffer business at a profit and finally – possibly after further sales and purchases – the goods reach a business which sells them to a VAT-registered trader in another Member State, sometimes even to the original supplier in the first Member State. This last sale is exempt with a right to deduct the input VAT, which the exporting business then attempts to recover from the Commissioners.
This type of fraud costs the United Kingdom’s public revenue in excess of GBP 1 500 million per annum.
According to the order for reference, the Commissioners submit that the power to enact sections 17 and 18 of the Finance Act 2003 stems from Articles 21(3) and 22(8) respectively of the Sixth Directive.
The Federation submits that neither Article 21(3) nor Article 22(8) of the Sixth Directive gives Member States the power to adopt provisions such as the said sections 17 and 18.

Questions

(1) Does Article 21(3) of [Sixth Directive 77/388], as amended by [Directive 2000/65], permit Member States to provide that any person may be made jointly and severally liable for payment of tax with any person who is made so liable by Article 21(1) or 21(2), subject only to the general principles of Community law, namely that such a measure must be objectively justifiable, rational, proportionate and legally certain?
(2) Does Article 22(8) of [Sixth] Directive [77/388, as amended,] permit Member States to provide that any person may be made so liable or to provide that one person may be required to provide security for tax due from another subject only to the aforesaid general principles?
(3) If the answer to the first question is no, what limits, other than those imposed by the aforesaid general principles, are there on the power conferred by Article 21(3)?
(4) If the answer to the second question is no, what limits, other than those imposed by the aforesaid general principles, are there on the power conferred by Article 22(8)?
(5) Are Member States precluded by [Sixth] Directive [77/388], as amended, from providing for joint and several liability of taxpayers or from requiring one taxpayer to provide security for tax due from another in order to prevent abuse of the VAT system and protect revenues properly due under that system, if such measures comply with the aforesaid general principles?

AG Opinion

(1) Article 21(3) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, permits Member States to provide that any person may be made jointly and severally liable for payment of VAT with any person who is made so liable by Article 21(1) or (2) of the same directive, subject to the general principles of Community law, such as the principle of proportionality and the principle of legal certainty.
In light of these principles, a person may be held jointly and severally liable for payment of VAT when, at the time he effected the transaction, he knew or ought to have known that VAT would go unpaid in the supply chain. In this respect, the national tax authorities may rely on presumptions, provided that these presumptions are rebuttable and that they arise from circumstances, indicative of the occurrence of VAT fraud, which traders may be expected to know or reasonably be required to inform themselves of.
(2) Article 22(8) of the same directive does not permit Member States to provide that any person may be made jointly and severally liable for payment of VAT with any person who is made so liable by Article 21(1) or (2) of the directive, nor does Article 22(8) permit Member States to require a person who is not liable for payment of VAT in accordance with Article 21 of the directive to provide security for the payment of VAT due from another.

Decision

1. Article 21(3) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, as amended by Council Directives 2000/65/EC of 17 October 2000 and 2001/115/EC of 20 December 2001, is to be interpreted as allowing a Member State to enact legislation, such as that in issue in the main proceedings, which provides that a taxable person, to whom a supply of goods or services has been made and who knew, or had reasonable grounds to suspect, that some or all of the value added tax payable in respect of that supply, or of any previous or subsequent supply, would go unpaid, may be made jointly and severally liable, with the person who is liable, for payment of that tax. Such legislation must, however, comply with the general principles of law which form part of the Community legal order and which include, in particular, the principles of legal certainty and proportionality.

2. Article 22(8) of Sixth Directive 77/388, as amended by Directives 2000/65 and 2001/115, is to be interpreted as not allowing a Member State to enact either legislation, such as that in issue in the main proceedings, which provides that a taxable person, to whom a supply of goods or services has been made and who knew, or had reasonable grounds to suspect, that some or all of the value added tax payable in respect of that supply, or of any previous or subsequent supply, would go unpaid, may be made jointly and severally liable, with the person who is liable, for payment of that tax, or legislation which provides that a taxable person may be required to provide security for the payment of that tax which is or could become payable by the taxable person to whom he supplies those goods or services or by whom they are supplied to him.

By contrast, that provision does not preclude a national measure which imposes on any person who is, pursuant to a national measure adopted on the basis of Article 21(3) of Sixth Directive 77/388, jointly and severally liable for payment of value added tax, a requirement to provide security for the payment of that tax which is due.

Summary

Source