CJEU reminds that VAT taxpayers do not have to control their contractors

The Court of Justice of the European Union, in its judgment of 11 January 2024 in Case C-537/22, reminded that exercising the right to deduct VAT does not require a taxpayer to undertake a comprehensive and in-depth verification of its counterparty. This is something that Polish tax authorities constantly seem to forget.

According to the now well-established CJEU case law, a taxpayer may be denied the right to deduct VAT when it is confirmed that the taxpayer:

• committed VAT fraud,
• knew of fraud or
• should have known that the transaction in which he was involved and which was to give rise to a right of deduction involved fraud (i.e. he failed to exercise due diligence in his dealings with his counterparty).

As the CJEU points out – it is incumbent on the national authorities to adequately investigate whether the taxpayer has taken reasonable measures to guard against potential involvement in tax fraud (i.e. exercised due diligence). This, in turn, gives rise to  endless disputes between taxpayers and the Polish tax authorities as to the steps that should be sufficient to establish that the taxpayer acted with due diligence and adequately investigated its counterparty.

In its January judgment in Case C-537/22, the CJEU summarised a number of important principles that must guide tax authorities (including Polish ones) conducting proceedings for refusal of the right to deduct VAT and the obligations in this respect.

As the CJEU stated:

• it is incumbent on the tax authority to carry out tax audit activities and accurately identify the elements of tax fraud that have occurred in the supply chain and to provide evidence of tax fraud;
• it is also incumbent on the tax authority to demonstrate unequivocally the objective circumstances that make it possible to conclude that the taxpayer should have known that the transaction in question involved such fraud (that he did not exercise due diligence);
• in order to exercise the right to deduct VAT, taxpayers are not required to carry out a comprehensive and in-depth verification of their supplier – due diligence does not mean that the taxpayer must carry out extensive checks on his supplier;
• the taxpayer is obliged to take only such verification measures as may reasonably be required of him in the circumstances of the case;
• the tax authorities may not require the taxpayer to carry out inspections with his contractor that are not, in principle, his responsibility (but that of the tax authority);
• nor can the authorities expect a taxpayer wishing to exercise his right to deduct VAT to examine whether his supplier has complied with his obligations to declare and pay VAT.

The Court in this judgment also recalled that the principle of the primacy of Union law imposes an obligation on all  EU Member State authorities to ensure the full effectiveness of the rules of Union law. This means that, where the case law of the Court has already given a clear answer concerning the interpretation of Union law, it is for the national courts to do everything necessary to ensure that this interpretation is implemented in each EU Member State. This even leads to an obligation on the national court to amend established case law if it is based on an interpretation of national law that is incompatible with Union law.

Although the judgment in question does not contain groundbreaking conclusions – it is nevertheless a very valuable reminder of fundamental issues that are very often overlooked by Polish tax authorities and administrative courts.

The CJEU made it clear that national authorities and courts are also EU bodies and are obliged to give primacy to EU law over the law of the EU Member States. The CJEU also pointed out that the exercise of the right of deduction is not a privilege of certain taxpayers, but a fundamental principle of the VAT system, and taxpayers are not obliged to undertake extensive verification of their contractors.