© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
A11. Proportionality
Intensity of review​
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- Different potential standards
"Although it is not necessary for our decision, I should clarify one point about the approach to proportionality. There has been a debate between the parties about the correct legal test to determine whether a measure was proportionate. HMRC maintain that the applicable test is whether the relevant measure is "manifestly disproportionate", relying on R (on the application of Seabrook Warehousing Ltd) v Revenue and Customs Commissioners [2019] EWCA Civ 1357 at [84]-[85] and [92], whereas ICSL rely instead on the stricter review standard in R (Lumsdon and others) v Legal Services Board [2015] UKSC 41, [2016] AC 697 ("Lumsdon") at [33], in outline whether the measure is appropriate to achieve the objective pursued and whether it is necessary to achieve that objective. The UT found it unnecessary to decide the debate because it concluded against ICSL using its preferred formulation. However, as we canvassed at the hearing, the debate is simply not to the point." (Impact Contracting Solutions Ltd v. HMRC [2025] EWCA Civ 623, Falk LJ)
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Correctness and anti-fraud measures must comply with proportionality​
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- Right to deduct input tax not to be systematically undermined
"[52] Furthermore, it must be noted that the measures which the Member States may adopt under Article 22(8) of the Sixth Directive in order to ensure the correct levying and collection of the tax and for the prevention of fraud must not go further than is necessary to attain such objectives. They may not therefore be used in such a way that they would have the effect of systematically undermining the right to deduct VAT, which is a fundamental principle of the common system of VAT established by the relevant Community legislation (see, to that effect, Joined Cases C-286/94, C-340/95, C-401/95 and C-47/96 Molenheide and Others v Belgian State [1997] ECR I-7281, paragraph 47)." (Gabalfrisa C-110/98)
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Legitimate aim​
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- Not permissible to penalise a breach of national law by refusing exemption
"[22] Consequently, if the aim of the refusal by a Member State to allow for an export transaction a VAT exemption laid down by the Sixth Directive is to penalize the breach of a national provision requiring authorization for such an export, the refusal serves a purpose alien to that of the Sixth Directive." (Lange C-111/92)
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Pre-trading input tax and proportionality​
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- Not permissible to make right to deduct conditional on submission of express request or upon supplies commencing within 1 year
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" The answer to the question from the national court must therefore be that Article 17 of the Sixth Directive precludes national legislation which makes the exercise of the right to deduct VAT paid by a taxable person liable thereto before he starts regularly carrying out taxable transactions conditional upon the fulfilment of certain requirements such as the submission of an express request to that effect before the tax concerned becomes due and compliance with a time-limit of one year between that submission and the actual commencement of taxable transactions, and which penalises infringement of those requirements by forfeiture of the right to deduct or deferment of the exercise of that right until the time at which taxable transactions actually begin to be carried out on a regular basis." (Gabalfrisa C-110/98)
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Measure must be an appropriate way of pursuing the legitimate aim​
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- Presumption of fraud based on low volume of supplies not permitted
"[39] Such a presumption is based on a criterion, that of an income threshold, which is unconnected to the criteria required for the purposes of demonstrating fraud or abuse, as is apparent from the case-law cited in paragraphs 33 to 36 of the present judgment. That presumption is based not on the assessment of whether the transactions subject to VAT were actually carried out during a given taxable period or whether they were used in the strict sense in order to carry out output transactions, but only on the assessment of their volume. It cannot, therefore, having regard to the case-law cited in paragraph 34 of the present judgment, be regarded as being capable of demonstrating that the right to deduct VAT was relied on fraudulently or abusively." (Feudi C-341/22)
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Proof​
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- Proof of reduction of consideration cannot be dependent on invoice where recipient of reduction does not issue invoices
"[63] However, in so far as possession of an invoice is, under national law, an essential condition for the reduction of the taxable amount, VAT neutrality is affected when it is impossible or excessively difficult for the person entitled to the refund to obtain such an invoice (see, to that effect, judgment of 26 January 2012, Kraft Foods Polska, C‑588/10, EU:C:2012:40, paragraph 38).
[64] It is apparent from the order for reference that Boehringer Ingelheim does not have invoices in respect of the payments it made to the State health insurance agency, since the latter issued only requests for payment.
[65] In such a situation, the principles of VAT neutrality and proportionality require the Member State concerned to permit the taxable person to establish by other means before the national tax authorities that the transaction giving entitlement to a reduction in the taxable amount was in fact carried out (see, to that effect, judgment of 26 January 2012, Kraft Foods Polska, C‑588/10, EU:C:2012:40, paragraph 40). This is especially so where, as in the present case, the transaction in question took place with regard to a State entity." (Boehringer Ingelheim C-717/19)
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- Not proportionate to refuse zero-rating for export due to absence of formal documents if tax authority has other proof
"[39] As the European Commission submits, although the Member States impose formal requirements pursuant to Article 131 of the VAT Directive, those conditions must not, however, alter the scope of the exemptions provided for by that directive. It would not be proportionate to refuse to apply the exemption to an export on the sole ground that the taxable person does not have the correct export documents if, as in the present case, the tax authorities are certain that the goods have been exported. Such a refusal would go beyond what is necessary to ensure the correct collection of the tax, since the VAT exemption would be subject to excessive formal requirements, without any examination as to whether the substantive exemption criteria are actually satisfied." (W C-602/24)
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Failure to comply with formal requirements​
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- Only two situations where failure to meet formal requirements results in loss of entitlement to exemption
"[40] According to the Court’s case-law, there are only two situations in which the failure to meet a formal requirement may result in the loss of entitlement to an exemption from VAT (judgment of 17 October 2019, Unitel, C‑653/18, EU:C:2019:876, paragraph 29 and the case-law cited).
[41] First, a breach of a formal requirement may lead to the refusal of an exemption from VAT if the effect of the breach is to prevent the production of conclusive evidence that the substantive requirements have been satisfied (judgment of 17 October 2019, Unitel, C‑653/18, EU:C:2019:876, paragraph 30 and the case-law cited).
[42] However, that is clearly not the case in the main proceedings, in which, as has been pointed out in paragraphs 23 to 31 of the present judgment, all the substantive conditions for the exemption provided for in Article 146(1)(b) of the VAT Directive are satisfied.
[43] Second, the principle of fiscal neutrality cannot be relied on for the purposes of an exemption from VAT by a taxable person who has intentionally participated in tax evasion which has jeopardised the operation of the common system of VAT. According to the Court’s case-law, it is not contrary to EU law to require an operator to act in good faith and to take every step which could reasonably be asked of him or her to satisfy him or herself that the transaction which he or she is carrying out does not result in his or her participation in tax evasion. If it were concluded that the taxable person concerned knew or ought to have known that the transaction he or she carried out was part of a fraud committed by the person acquiring the goods and that he or she has not taken every step which could reasonably be asked of him or her to prevent that fraud from being committed, he or she would have to be refused the exemption (judgment of 17 October 2019, Unitel, C‑653/18, EU:C:2019:876, paragraph 33 and the case-law cited)." (W C-602/24)
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Fraud and proportionality​
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- Sharing of risk of fraud between supplier and tax authorities must be consistent with proportionality
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"[22] This is why the objective of preventing tax evasion referred to in Article 15 of the Sixth Directive sometimes justifies stringent requirements as regards suppliers’ obligations. However, any sharing of the risk between the supplier and the tax authorities, following fraud committed by a third party, must be compatible with the principle of proportionality (Teleos and Others, paragraph 58)." (Netto Supermarket C-271/06)
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- Clearly disproportionate to hold supplier liable for fraudulent acts over which it had no influence
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"[23] That will not be the case if a tax regime imposes the entire responsibility for the payment of VAT on suppliers, regardless of whether or not they were involved in the fraud committed by the purchaser (see, to that effect, Teleos and Others, paragraph 58). As the Advocate General has pointed out in point 45 of his Opinion, it would clearly be disproportionate to hold a taxable person liable for the shortfall in tax caused by fraudulent acts of third parties over which he has no influence whatsoever." (Netto Supermarket C-271/06)
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- Not disproportionate to require supplier to take every step reasonably required to be satisfied not participating in fraud
"[24] On the other hand, as the Court has already held, it is not contrary to Community law to require the supplier to take every step which could reasonably be required of him to satisfy himself that the transaction which he is effecting does not result in his participation in tax evasion (see Teleos and Others, paragraph 65, and the case-law cited there)." (Netto Supermarket C-271/06)
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- Refusal of registration must be based on sound evidence that it is probable VAT registration will be used fraudulently
"[34] In order to be considered proportionate to the objective of preventing evasion, a refusal to identify a taxable person by an individual number must be based on sound evidence giving objective grounds for considering that it is probable that the VAT identification number assigned to that taxable person will be used fraudulently. Such a decision must be based on an overall assessment of all the circumstances of the case and of the evidence gathered when checking the information provided by the undertaking concerned." (Ablessio C-527/11)
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Penalties​
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- Penalties must comply with proportionality
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"[44] That directive does not expressly provide for a system of penalties in the event of infringement of the obligations in Article 213(1) thereof. It is settled case-law that, in the absence of harmonisation of European Union legislation in the field of penalties applicable in cases where conditions laid down by arrangements under that legislation are not complied with, Member States are empowered to choose the penalties which seem to them to be appropriate. They must, however, exercise that power in accordance with European Union law and its general principles, and consequently with the principle of proportionality (see Case 68/88 Commission v Greece [1989] ECR 2965, paragraph 23; Case C-210/91 Commission v Greece [1992] ECR I-6735, paragraph 19; and Case C-36/94 Siesse [1995] ECR I-3573, paragraph 21).
[45] It is therefore legitimate for the Member States, in order to ensure the correct levying and collection of the tax and to prevent fraud, to provide in their respective provisions of national law for appropriate penalties to sanction the failure to observe the obligation to register in the register of taxable persons for VAT purposes." (RÄ“dlihs C-263/11)
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- Must not go further than necessary
"[46] Such penalties must not, however, go further than is necessary to attain those objectives (see, to that effect, Joined Cases C-95/07 and C-96/07 Ecotrade [2008] ECR I-3457, paragraphs 65 to 67, and Case C-284/11 EMS-Bulgaria Transport [2012] ECR, paragraph 67)." (RÄ“dlihs C-263/11)
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- Nature and degree of seriousness of infringement must be taken into account
"[47] In order to assess whether the penalty here at issue is consistent with the principle of proportionality, the nature and the degree of seriousness of the infringement which that penalty seeks to sanction must, inter alia, be taken into account, as must also the means of establishing the amount of that penalty." (RÄ“dlihs C-263/11)
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- As must severity of penalty
"[44] That negative practical consequence of the removal from the VAT register means that the taxable person may be led to cease activity and thus resembles a temporary or permanent prohibition on pursuing that activity. It follows that, if the removal from the VAT register were to be perceived as a penalty for the repeated failure by the taxable person to comply with VAT obligations, that would be a particularly severe penalty.
[45] In accordance with the case-law referred to in paragraph 38 above, such a penalty cannot be regarded as consistent with the principle of proportionality, in so far as it is imposed without examining the nature and the degree of seriousness of the infringements committed by the taxable person in order to determine whether such a severe penalty is warranted or whether another, less severe penalty is sufficient in the circumstances that led to the imposition of such a penalty."(Cityland C-164/24)
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- Failure to register penalty is breach of formal requirement and not designed to recover tax
"[48] As regards, first, the nature and seriousness of the infringement which the penalty at issue seeks to sanction, it is important to point out that that penalty is intended to sanction solely the failure to comply with the obligation to register in the register of taxable persons for VAT purposes. The Court has had the opportunity to state, in this regard, that the obligations set out in Article 213 of the VAT Directive, of which the obligation for the taxable person to declare the commencement of his activity as a taxable person is one, constitute only a formal requirement for the purposes of verification (see, to that effect, Case C-385/09 Nidera Handelscompagnie [2010] ECR I-10385, paragraph 50).
[49] The penalty at issue is thus not designed to ensure recovery of the tax from the party liable for it. The competent authorities may proceed with such recovery, regardless of whether a penalty is imposed for failure to register." (RÄ“dlihs C-263/11)
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- Failure to register penalty set at amount of tax that would be payable may go further than is necessary
"[50] With regard, secondly, to the means of establishing the amount of the penalty at issue, it is important to note that this constitutes a fixed percentage, set at a level equal to that of the tax payable on the supplies effected, even if the object of that penalty is not the recovery of the tax, as stated in the previous paragraph.
[51] Moreover, it must be observed that, as is apparent from the written observations of the Latvian Government, the Latvian legislature has adopted new provisions which provide for a graduated scale of penalties for failure to register.
[52] In the present case, it is possible that the procedure for establishing the amount of the penalty may go further than is necessary to attain the objectives set out in paragraph 45 of this judgment.
[53] Such a penalty may therefore prove to be disproportionate." (RÄ“dlihs C-263/11)
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Cross-border problems​
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- Mutual assistance mechanisms addressing problems collecting tax from taxpayers based in other Member States
"[73] In the third place, the mutual assistance mechanisms existing between the authorities of the Member States are sufficient to enable the Member State in which the dividends are paid to check the accuracy of the evidence put forward by non-resident companies wishing to claim a deferral of taxation of dividends which they have received (see, to that effect, judgment of 12 July 2012, Commission v Spain, C‑269/09, EU:C:2012:439, paragraph 68).
[74] In that connection, Council Directive 77/799/EEC of 19 December 1977 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation and taxation of insurance premiums (OJ 1977 L 336, p. 15), as amended by Council Directive 2004/106/EC of 16 November 2004 (OJ 2004 L 359, p. 30), repealed and replaced by Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation and repealing Directive 77/799 (OJ 2011 L 64, p. 1), allows a Member State to apply to the competent authorities of another Member State for all the information required to allow it to ascertain the correct amount of income tax.
[75] Further, Article 4(1) of Council Directive 2008/55/EC of 26 May 2008 on mutual assistance for the recovery of claims relating to certain levies, duties, taxes and other measures (OJ 2008 L 150, p. 28), repealed and replaced by Council Directive 2010/24/EU of 16 March 2010 concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures (OJ 2010 L 84, p. 1), provides that ‘at the request of the applicant authority, the requested authority shall provide any information which would be useful to the applicant authority in the recovery of its claim’. That directive therefore allows the Member State in which dividends are paid to obtain, from the Member State of residence, the information necessary to allow it to recover a tax liability which arose when the dividends were distributed.
[76] Thus, Directive 2008/55 provides the authorities of the Member State in which dividends are paid with a framework of cooperation and assistance that allows them actually to recover a tax liability in the Member State of residence (see, to that effect, judgments of 29 November 2011, National Grid Indus, C‑371/10, EU:C:2011:785, paragraph 78, and of 12 July 2012, Commission v Spain, C‑269/09, EU:C:2012:439, paragraphs 70 and 71).
[77] Accordingly, if the advantage associated with the deferral of taxation on dividends distributed were also granted to loss-making non-resident companies, that would have the effect of eliminating any restriction on the free movement of capital, but would not thereby impede the achievement of the aim pursued by the national legislation at issue in the main proceedings.
[78] In those circumstances, justification of the national legislation at issue in the main proceedings in the effective collection of tax cannot be accepted." (Sofina C-575/17)
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Liability​
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- Imposing system of strict joint and several liability disproportionate
"[61] In that regard, according to case-law, national measures which bring about a system of strict joint and several liability go beyond what is necessary to preserve the public exchequer’s rights. Imposing responsibility for paying VAT on a person other than the person liable to pay that tax, without allowing him or her to escape liability by providing proof that he or she had nothing whatsoever to do with the acts of the person liable to pay the tax must, therefore, be considered contrary to the principle of proportionality. It would clearly be disproportionate to hold that person unconditionally liable for the shortfall in tax caused by acts of a third party over which he or she has no influence whatsoever (judgment of 14 November 2024, Herdijk, C‑613/23, EU:C:2024:961, paragraph 25 and the case-law cited)." (PK C-278/24)
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