Evidence of wilful misconduct or negligence necessary for imposing penalties on VAT errors

08.2012

The tax administration has a strong tendency to apply penalties based solely on the non-compliance of a tax rule. While it is true that VAT must be a particularly formal tax in order to prevent abusive situations, under no circumstances can penalties be justified when there is no fault from the taxpayer, that is, just for the sake of strict liability.

In this regard, it is worth mentioning a ruling of the Spanish “Tribunal Supremo” from 18 July 2011, which clearly establishes that penalties cannot be imposed for the mere lack of invoices in those cases in which, presuming a reasonable application of tax regulations and the taxpayer’s bona fide, said taxpayer intends to deduct input VAT for works actually carried out and for which he holds a supporting document, even if it is not an invoice. This ruling is indeed very exhaustive, as it deals with several aspects that are relevant to VAT, and for this, reading it is highly recommended. The ruling clearly establishes that the formal requirements of this tax are designed to enable the proper application thereof, and its very mechanism recognises the right of deduction. This right is so important that any additional demand or requirement imposed by the tax administration must be considered null and void.

For this reason, the conduct of the taxpayer, even when some formal errors were committed, cannot be penalised. That is to say, “automatic” penalties, which are applied without considering whether or not fault on the taxpayer’s part exists, are completely void. The ruling closes by rejecting the penalty imposed on the taxpayer in consideration that there was no fault on his part.

++Published at the tax newsletter of the German Chamber of Commerce related to VAT news.++