Trust is good, checking is better, certainly in VAT

An employee issued more than 1,600 false invoices over three years. Who owes the VAT shown on them, the employee or the employer? The Court of Justice gives the answer.

Management lore has it that checking is good but trusting is better. The thinking is that an employee trusted to take decisions will be more motivated than one who needs approval for everything. A recent judgment of the Court of Justice shows that an employer who gives an employee too much latitude can face a substantial VAT bill when that trust is abused.

The facts

The case concerns a business operating, among other things, a small petrol station in Poland. The station was run by an employee who over three years issued more than 1,600 false invoices showing VAT to entities that deducted it. Those invoices were not recorded in the accounts and the VAT on them was neither declared nor paid.

The method was as follows. The false invoices were notionally linked to genuine fuel sales recorded by the tills. The employee attached authentic till receipts corresponding to sales to entities other than those named on the invoices. The invoices were drawn up, issued and traded without the employer's permission or knowledge, in order fraudulently to obtain VAT refunds for the recipients.

The manager did not act alone. Other employees fished the till receipts out of the bins and handed them to him for payment. The false invoices were stored on the station's computer in a format different from the usual one and could not be accessed without unlocking the machine. The invoices did carry the station's details, including its VAT identification number.

Who owes the VAT?

The manager was dismissed for misconduct, but the affair had a VAT sting in the tail for the employer. The Polish tax authorities demanded that he pay the VAT shown on the false invoices, because he had not been sufficiently careful. There was no document setting out the manager's specific duties, and the employer was criticised for knowing that invoices were being issued on the basis of till receipts without any accounting check.

Under VAT law, anyone who wrongly shows VAT on an invoice owes that VAT. But who showed it here: the employee who drew up and issued the invoices, or the employer whose details appeared on them?

The Court of Justice held that the VAT shown on the false invoices is in principle owed by the dishonest employee. Where the employer has been too trusting and insufficiently careful in supervising the employee handling invoicing, however, the employer gets the bill.

For employers registered for VAT the lesson is therefore: trust is good, checking is necessary.