The CJEU rules on the joint and several liability and the default interests for VAT delays

On 20 May 2021, the Court of Justice of the European Union (“CJEU”) published its preliminary ruling upon a reference made by the Supreme Administrative Court of the Republic of Bulgaria (“SAC”) regarding the joint and several liability and the default interests for VAT payment delays.

The interpreted provisions relate to the joint and several liability of value added tax (“VAT”) payers. This is a special type of joint and several liability for a registered person - recipient of a taxable supply, which arises if certain legally established conditions are met.

The CJEU ruled that the provisions of Article 205 of the VAT Directive, read in the light of the principle of proportionality, must be interpreted as not precluding national legislation pursuant to which the person held jointly and severally liable must pay, in addition to the VAT not paid by the person liable for payment of that tax, the default interest on that amount. This is applicable in cases where it is proved that, in exercising its right of deduction, the person in question knew or should have known that the counterparty liable for payment would not pay the VAT.

This interpretation is in line with the objectives pursued by the European Union for the prevention of possible tax evasion, tax avoidance and abuse.

The Court states that the relevant provisions of the VAT Directive have as their primary objective the maintenance and security of the state budget so as to ensure the efficient collection of VAT from the most appropriate person in the light of the specific situation. The provision is considered to allow Member States to adopt measures whereby a person other than the ordinary VAT payer, is jointly and severally liable for the payment of the due tax. Given the lack of regulation in the VAT Directive, Member States should lay down the rules and conditions for the exercise of joint and several liability.

According to the CJEU, the relevant provisions of the VAT Directive allow Member States to hold a person jointly and severally liable for a VAT when, at the time of the transaction in his favour, they knew or should have known that the tax due for this, previous or subsequent transaction, will remain unpaid. Member States should refer to presumptions, unless the presumptions are formulated in such a way as to prove practically impossible or excessively difficult for the taxable person to rebut them and to establish a regime of objective responsibility that goes beyond what is necessary to protect the fisc. The CJEU states that the existence of certain circumstances should be taken into account when assessing whether another person than the payer is jointly and severally liable to pay the due VAT. These circumstances are: whether they acted in good faith, taking care of a good trader, whether they took all reasonable measures within their means and whether their involvement in abuse or fraud is excluded.

Observing the principle of proportionality, the Court has stated that the exercise of the power of the Member States to designate a joint and several debtor other than the taxable person must be subject to special circumstances. Thus, a taxable person - recipient of a taxable supply will be considered jointly and severally liable for the payment of the due tax by their co-contractor even though they have paid it together with the transaction price.

According to the provision of Article 177, para. 2 of the Bulgarian VAT Act, which corresponds to interpreted provisions of the VAT Directive, a person should be jointly and severally liable for the payment of the due tax when that person has exercised his right to deduct a tax credit, even though knew or should have known that the payer did not intend to pay the tax [1]. The Audit authority must prove the existence of these circumstances.

According to Article 177, para. 3 of the VAT Act, the presumption of knowledge of facts and circumstances is established by law, which is part of the factual composition of joint and several liability [2]. The presumption is rebuttable. The State must verify that the person concerned has the opportunity to prove their good faith in that regard. Furthermore, it should be accounted whether it is practically impossible or excessively difficult to rebut such a presumption.

Pursuant to Article 177 of the VAT Act, joint and several liability of the persons specified in this Article is allowed only for the payment of VAT. At the same time, according to Article 16, para. 3 of the Tax and Social Insurance Procedure Code (“TSPC”), these persons may also be obliged to pay interest for delay due to non-payment of VAT by the payer [3].

The Court has held that, despite the relevant provisions relating only to joint and several liability for the payment of VAT, this text does not preclude Member States from being able to impose on the joint and several debtor all obligations relating to that tax. Such is the obligation to pay default interest due for non-payment of VAT by its payer. In this situation, Member States may extend the scope of the joint and several liability regime to include those obligations only if such an extension is justified in order to ensure the effective collection of VAT in the state budget. It follows that the payment of interest related to the main obligation for delay by the joint and several debtor, allows to counteract the abuses of VAT and thus contributes to the achievement of the VAT Directive.

[1] Article 177. (1) (Amended, SG No. 94/2012, effective 1.01.2013) Any registered person who is the recipient in a taxable supply shall be liable for the value added tax due and unremitted by another person insofar as the former person has exercised a right to deduct credit for input tax related directly or indirectly to the due and unremitted tax.

[2] For the purposes of Paragraph (2), the person shall be presumed to have been obliged to know where the following conditions are simultaneously fulfilled:

(i) the tax due under Paragraph (1) was not effectively effected as paid in as a net tax for a tax period by any of the previous suppliers under a taxable supply whereof the subject are the same goods or services, regardless of whether in the same, modified or processed form, and

(ii) the taxable supply is simulated, circumvents the law, or is at a price which significantly departs from the market price.

[3] Article 16, para. 3, the liability of the obligated person referred to in Item 3 of Article 14 herein shall comprehend the taxes and compulsory social-insurance contributions, the interest payable and the costs of the collection thereof.