How ‘knew or should have known’ of VAT fraud leads to criminal punishment

Knew or should have known’ is the magical formula by which the Dutch Tax Authorities are trying to tackle VAT fraud. For the zero rate (on deliveries within the EU) or the right to deduct input tax to be refused, it is sufficient that the taxable person ‘should have known’ that their suppliers or buyers (who are often in other countries) committed VAT fraud. A retrospective levy (usually of 21%) because you have failed to properly inform yourself feels pretty much like a penalty. This is problematic because these grounds for a retrospective levy are not regulated by law, and hence conflict with the principle of ‘no penalty without law’. This blog explains how this state of affairs came to exist.

Businessman trapped on mousetrap on white background.

Criteria for zero rate / deduction of input tax

The VAT system is arranged in such a way that a business supplying goods to a business in another EU Member State charges 0% VAT (the zero rate). In addition, although the business supplying the goods does not charge VAT, it does have the right to deduct input tax. In its ruling on the VSTR case, the European Court of Justice (ECJ) determined (in section 30) that three criteria are applicable here:

  • The buyer acts in the capacity of taxable person;
  • There is a transfer of power to dispose of goods as owner; and
  • The goods have been (physically) relocated (to another Member State).

In addition, the ECJ determined that no other criteria but these three can be set for the ability to apply the zero rate and the right to deduct input tax. However, in the ruling on the Halifax case, the ECJ determined that if tax fraud is committed by the taxable person him/herself (‘for example, by presenting a false tax return or drawing up false invoices’), then these criteria are not met (and thus there is no right to apply the zero rate or deduct input tax).

The ECJ does not explain which criterion has not been met in the event of fraud. This may have to do with the ECJ’s determination in section 52 of the VSTR ruling concerning the ‘capacity of taxable person’, i.e. that the supplier is required to act in good faith and to take every measure which can reasonably be required of him to ensure that the transaction that he effects does not lead to his participation in tax fraud. The latter is also referred to as ‘prudent business management’.

The Kittel ruling

The ruling in the Kittel case was ground breaking. This because, in that ruling, the ECJ determined that:

“In the same way, a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT (…), must be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods.”

Due to this ruling, it is no longer necessary for the relevant taxable person to have committed fraud for the zero rate or the right to deduct input tax to be refused. It is sufficient that he ‘knew or should have known of fraud in the chain of deliveries’ he was involved in. With this, the ECJ has tried to give the European tax authorities more resources to combat VAT fraud. Because a retrospective levy in the Netherlands does not affect the taxability of the acquisition in the other country, Prof. Van Hilten spoke in her oration of 24 November 2016 of a ‘ghost tax’ which has the effect of disrupting competition.

Is a retrospective levy of 21% a penalty?

If it turns out that a business in Europe has supplied goods at 0% VAT, while according to the Tax Authorities it should have noticed the possibility of fraud on the part of the buyer, a retrospective levy can be imposed at the applicable rate (usually 21% in the Netherlands). The question arises as to whether this amounts to criminal punishment (of the negligent business). This is relevant because, pursuant to Article 7 of the European Convention on Human Rights, no penalty can be imposed unless the deed was already an offence under law (which is not the case here). In the landmark ruling on the case Engel versus The Netherlands, the European Court of Human Rights (ECHR) formulated three criteria on the basis of which the Court judges whether a penal sanction is applied. These criteria are as follows:

  1. The qualification according to international law
  2. The nature of the offence
  3. The nature and the degree of severity of the penalty

In later jurisprudence, the ECHR has indicated that it regards the second and third criteria in the Engel ruling as of particular importance. In relation to the second ‘Engel’ criterion, the Court of Justice’s comment in the Kittel ruling concerning the nature of ‘knowing or should have known’ of fraud is significant:

“57    In such a situation the tax subject is, after all, aiding the fraudsters and he becomes their accomplice.

58     An interpretation of this type counteracts fraudulent activities by making it more difficult to accomplish them.”

In relation to the third ‘Engel’ criterion, the nature and the degree of severity of the penalty, it is important to notice that VAT is intended to tax consumption and should therefore not be imposed on businesses. A retrospective levy of 21% can therefore only be intended as a ‘deterrent’. The deterrent function of penalties also plays a central role in criminal law. With respect to the ‘degree of severity of the penalty’, it is also relevant that the refusal of both the zero rate and the right to deduct input tax means that the business is de facto doubly punished. Finally, I refer to the overkill at ‘chain level’ which the ‘knew or should have known’ approach entails. In this way, in fact, retrospective levies can be imposed on several (if not all) businesses, so that more VAT is levied in total than was lost due to the fraud. In my opinion, this overkill underlines the punitive nature of the extrajudicial facility to impose retrospective levies on ‘participation in fraud’. Judging by the ‘Engel’ criteria, the conclusion is that there can be little doubt as to whether a punitive penalty is involved.

The Italmoda and Stehcemp rulings

Regarding the answer to the question whether criminal punishment is involved if the business, which knew or should have known of fraud on another’s part, is refused the zero rate or the right to deduct input tax, the ECJ gives varying signals. For example, the Court denied this in its ruling on the Italmoda case. In section 61, the Court determined that there was no penalty, because the refusal of the right to deduct input tax ‘is purely the consequence of the omission of the criteria required for this in the relevant stipulations of the Sixth directive’ (as mentioned previously). This approach is appealing in cases where the goods have only fictionally been traded. The reasoning appears to be “no ‘real’ trade/deliveries, so no deduction”.

In its (later) ruling on the Stehcemp case, the key issue was the right to deduct VAT input tax on invoices from a non-existing (fraudulent) business. The Court of Justice ruled that the assertion that the supplier was fraudulent does not detract from the right to deduct input tax, and that this changes only if the Tax Authorities can demonstrate that the taxable person ‘knew or should have known’ of the fraud. In this context, the Court of Justice does speak of a penalty:

“49. By contrast, where the material and formal conditions laid down by the Sixth Directive for the creation and exercise of that right are met, it is incompatible with the rules governing the right to deduct under that directive to impose a penalty, in the form of refusing that right to a taxable person who did not know, and could not have known, that the transaction concerned was connected with fraud committed by the supplier, or that another transaction forming part of the chain of supply prior or subsequent to that transaction carried out by the taxable person was vitiated by VAT fraud (…)”

Criminal risk liability

It is clear that everything hinges on the knowledge of the taxable person. A person who did not know (and ‘could not have known’) of the fraud cannot be penalised with refusal of deduction of input tax. A contrario, one may infer from this that a penalty can be imposed, in the form of refusal of the right to deduct input tax, on someone who knew or should have known, that he participated in fraud but did not himself commit fraud. Although there is no excuse for penalising if there is no prior legal basis for imposing a penalty, it is still possible to have (some) appreciation of this if there is a question of ‘knowing’ of fraud. However, with the phrase ‘should have known’, it appears that a criminal risk liability has arisen in the approach of the Court of Justice. This contrasts with the requirement in Dutch criminal law that intent must be proven for a fraud conviction, with conditional intention being the lower limit. For that, it is sufficient that the person involved consciously accepted the significant likelihood that a certain consequence will ensue, from which it can be objectively ascertained that the suspect (apparently) intended to commit the proscribed action. By contrast, with the phrase ‘should have known’ in relation to VAT fraud, the Court of Justice appears to assume gross negligence. This is because it opted not to deduce the ‘knowing’ from the lack of diligence (as with conditional intent), but to create a separate category for the purpose (‘should have known’) which deserves the same consequence (a retrospective levy of 21%). In the Netherlands, gross culpability is not sufficient for a criminal conviction in cases of suspected fraud. And there’s the rub. The possibility exists that this will cause the tax inspector to primarily become a public prosecutor in cases of VAT fraud, because the court dealing with tax affairs can reach a penalising verdict under more flexible conditions. Of course, it is already the case that the tax inspector can impose penal fines, with the subtle difference that such fines are linked to (a percentage of) the tax that was falsely unpaid and cannot be imposed without a tax assessment (only to penalise).

An identical paragraph to the one in the Stehcemp case can be found in section 47 of the ruling on the Mahagében case.


With the European jurisprudence concerning a taxable person who ‘knew or should have known that he participated in fraud’, VAT can be retrospectively levied on businesses that did not act carefully in supplying goods within the EU. Viewed from various perspectives, this possibility for retrospective levies, developed in jurisprudence, bears great similarity to criminal punishment. This is also apparent after comparison with the criteria developed by the ECHR for this purpose. The conclusion that criminal punishment is involved conflicts with Article 7 for the European Convention on Human Rights because a retrospective levy on a ‘negligent’ taxable person who ‘knew or should have known’ has no legal basis and, furthermore, is not explicitly regulated in the European VAT directive. In the Italmoda case, the Court of Justice denies that penalisation comes into play in cases where the ‘relevant criteria’ for the right to deduct input tax are not met. In its rulings on the Stehcemp and Mahagében cases, the Court of Justice does mention criminal punishment in this context. The conclusion that a retrospective VAT levy constitutes criminal punishment is even more alarming in cases where the taxable person did not know of fraud but ‘should have known’ of it. In these cases, there is no intent to defraud that can justify criminal punishment.

Nick van den Hoek, Attorney at law



Knew or should have known of VAT fraud

Combating VAT (turnover tax) fraud has been on the agenda of the European member states, including the Netherlands, for several years. Many rulings have been issued in recent years in particular by the Court of Justice of the European Union concerning the consequences of committing tax fraud. The line pursued in these rulings appears to be as good as complete now. In short, a taxable person is not entitled to invoke the right to deduction of input tax, apply the zero rate or obtain a refund if he knew or should have known of fraud elsewhere in the chain. In pursuing this line, the discussion on fraud cases will focus on the question of whether the taxable person knew or should have known of the fraud. I will discuss this in more detail below.

Closeup portrait, shocked, surprised, speechless business senior mature man, worker, employee, holding empty wallet, isolated white background. Bankruptcy, financial difficulty. Human face expression

Turnover tax levy

The Turnover Tax Act 1968 states that a tax is levied on all goods and services that are for sale in the Netherlands. Entrepreneurs charge the turnover tax (more commonly known as VAT) to the final buyer of the product or service. Often, before a product is purchased by the end consumer, it has gone through several links in the chain of entrepreneurs. ‘Something’ is added at each of those links by each of those entrepreneurs.

Every entrepreneur in the chain must charge VAT to his buyer (entrepreneur or consumer). The entrepreneurs in this chain collect the VAT from their buyers and pay this VAT to the Tax Authorities. On the other hand, the entrepreneur may then deduct the VAT charged to him. This ensures that the VAT levy between the entrepreneurs in the chain is tax-neutral and payment of the VAT ultimately rests with the end consumer. This is the person that ‘consumes’ the product or the service.

Example of a chain

Nederlands Engels
Leverancier grondstof Raw materials supplier
Producent van grondstof naar mobiele telefoon Raw material to mobile phone manufacturers
Groothandel mobiele telefoons Mobile telephone wholesaler
Winkel/verkoper mobiele telefoons Mobile phone shop/retailer
Consument die de mobiele telefoon koopt Consumer that purchases the mobile phone


The chain from entrepreneur to consumer does not have to play out only in the Netherlands. In practice, the chain regularly extends across Europe and the world. For example, the suppliers of the raw materials and the manufacturer are located in Italy and the wholesaler, retailer and consumer are in the Netherlands.

The assumption then is also that the VAT chain between the entrepreneurs VAT neutral. To facilitate this, intracommunity supplies and acquisitions of goods was incorporated into the VAT levy. The entrepreneur that supplies goods intra-communally to another entrepreneur (for example, the manufacturer to the wholesaler in the aforementioned chain example) does not have to charge VAT, but can deduct the VAT charged to him (with the purchase of the raw materials from the supplier) in advance. The VAT levy on the supply of the mobile phones is therefore actually moved from the manufacturer to the wholesaler in the example. The wholesaler then charges VAT to the shop/retailer. That link may also take place via the system of intra-community supplies and acquisitions.

What constitutes fraud?

The turnover tax system makes certain that VAT is susceptible to fraud. After all, the advance tax deduction is in no way linked to the payment of the relevant turnover tax. There is therefore a chance that, for example, the wholesaler does not declare the intra-community acquisition of the mobile phones, charge the shop/retailer VAT, and then does not pay that VAT to the Tax Authorities. In that case, there is a flaw in the VAT levy. The wholesaler has received the VAT, but does not declare it. This creates a financial advantage for him. In order to actually gain that advantage, the wholesaler disappears. This is often solved in the chain by establishing a new wholesaler, often with the same goal.

This type of fraud is generally called ‘carrousel fraud.’ There is no fixed definition for the concept ‘carrousel fraud,’ but various descriptions can be found. The core [1] of these descriptions is always that there is an invoice flow (real or not) that corresponds with trade transactions with at least one of the parties involved charging VAT in their own country, while he knows that he will not be declaring that amount on his tax return. The VAT that this party does not pay to the Tax Authorities will, however, be deducted by his buyer.

To match the description of a ‘carrousel fraud,’ it is no longer relevant that the goods go full circle (‘carrousel’). The crucial factor is that one party charges VAT, knowing that he is not going to declare it to the Tax Authorities and that his buyer will deduct the VAT that was charged to him. This seems to open the way for the case law that has been mainly set by the Court of Justice of the European Union to ensure that carrousel fraud cases also apply to all types of VAT fraud.

Apparently, the financial benefits of VAT fraud are lucrative enough that people are engaging in this on a large scale. This means that significant amounts of VAT cannot be collected. This is a cause of frustration for the European Union and the member states and they want to do their utmost to quash this type of fraud. This, however, may not involve taking rash action. The ‘good’ entrepreneurs should not have to suffer because of the ‘bad’ entrepreneurs’ actions. But what makes you a good entrepreneur? And when does the case law of the Court of Justice of the European Union apply to your ‘VAT fraud’?

Knew or should have known?

To determine if someone is a ‘good’ or a ‘bad’ entrepreneur, it must first be established if the entrepreneur in question is himself a fraud. If it is determined that this is indeed the case, this entrepreneur will, in fact, lose all this rights. As follows from the following paragraph, this entrepreneur will not be entitled to his right to deduct input tax in advance, to apply zero rate or a refund for number acquisition. However, it is usually not the ‘bad’ entrepreneurs that end up suffering the consequences of VAT fraud. These ‘bad’ entrepreneurs’ business is often set up with the goal of committing VAT fraud and making (a lot of) money before disappearing into the sunset. The chances of the Tax Authorities catching this ‘bad’ entrepreneur and recouping the wrongfully collected monies (or unpaid taxes) are therefore minimal.

It is therefore primarily ‘good’ entrepreneurs that have to deal with the adverse consequences of VAT fraud. The only way to avoid these adverse consequences is if the entrepreneur in question did not know and could also not have known of the VAT fraud.

These concepts of ‘knew’ or ‘should have known’ are not clear at a glance. Although the first concept, ‘knew,’ is clearer than the second, ‘should have known,’ it will have to be established what the knowledge of the entrepreneur was, using the facts and circumstances.

In the past, I made a comparison with ‘knew’ or ‘should have known,’ as it is used in the criminal and penalty law. For the ‘knew’ concept, a connection could be sought with the concept of ‘intent’. Intent is when someone knowingly and intentionally commits a finable or punishable offence. In other words, if someone consciously undertakes a specific action. If we apply this to VAT fraud, this means that the entrepreneur in question knows that VAT fraud is being committed, but that he nevertheless continues to participate in that transaction or in that chain in full awareness. In practice, it will not be this situation that gives rise to discussion between the parties, but the question of when a business owner ‘should have known’ of the VAT fraud in the chain.

For the explanation of ‘should have known,’ a connection may be sought with the concept ‘gross negligence’ from the penalty and criminal laws. Gross negligence is when the party involved did not want the relevant consequence, but it can be blamed on his negligence, carelessness, or neglect that the consequence has occurred. It can be deduced from this that a ‘good’ entrepreneur must be attentive and must act with due care. To comply with this, the entrepreneur has a certain obligation to investigate. This obligation to investigate means that an entrepreneur must do everything that may reasonably be expected of him to ensure that his actions are not part of a fraud chain (Court of Justice, Mahagében, 21 June 2012, joined cases no. C-80/11 and C-142/11 (Peter David).

Consequences of knowing of fraud?

It must be assessed for each taxable action whether the entrepreneur ‘knew or should have known’ that VAT fraud was being committed (Court of Justice, Optigen, 12 January 2006, joined cases C-354/03, C-355/03 and C-484/03). Within a chain, this may cause the entrepreneurs to be treated differently. One entrepreneur may have acted in good faith (did not know and also could not have known) and another entrepreneur may have known or should have known of the fraud.

If it is established that an entrepreneur knew or should have known of the VAT fraud, this will have significant consequences. It follows from the Italmoda ruling that in that case an entrepreneur is not entitled to the right to deduction of input tax, to apply the zero rate and/or obtain a refund for number acquisitions. These penalties even occur if the national legislation does not provide for this option. The Supreme Court even explicitly takes this into consideration in the ruling of 18 March 2016, no. 11/02825, ECLI:NL:HR:2016:442 (see ground for the decision 2.1 and 2.2).

If the entrepreneur has already exercised his right to deduction of input tax in the turnover tax return, he will receive an additional assessment to pay back the amount wrongfully deducted in advance to the Tax Authorities.

  1. The other possibility is that the entrepreneur exported the goods to another country with the application of the zero rate. If the entrepreneur can be charged with knowing about the VAT fraud, he will not be permitted to apply the zero rate, despite that the conditions ((i) right to dispose of the goods has been transferred, (ii) the goods are physically moved from one Member State to another and (iii) the goods have been supplied to an entrepreneur who has declared this as intra-community acquisition) have been fulfilled. The Court of Justice therefore rules that not all conditions have been fulfilled. The word ‘all’ refers to the fact that no VAT fraud must be committed. In this case, the entrepreneur will receive an additional assessment for turnover tax, in which the goods and/or services are taxed for VAT at the rate of 6% or 21%.
  2. Finally, there is the option to refuse a refund for number acquisition. In that case the entrepreneur has paid the VAT, but he is not entitled to a VAT refund.

The Court of Justice is of the opinion that VAT fraud must not pay off and that every effort should be made to combat and prevent such fraud. Should such fraud occur anyway, this may and should be dealt with severely, according to the recent case law of the Court of Justice. That this may possibly result in a breach of the fiscal neutrality in the VAT, the principles of legal certainty or the legitimate expectations is not important. Those principles, according to the Court of Justice, can and must be put aside if a taxable person knew or should have known of the VAT fraud in one of the links of his chain and in doing so jeopardised the proper functioning of the common VAT system.

At this time, there is still on-going discussion as to whether the Tax Authorities can handle all three possibilities for one taxable person simultaneously, i.e. refuse the deduction of input tax and the zero rate and the refund. If the Tax Authorities were allowed to apply all three options alongside each other, this would create a double or triple tax. This cannot and could not have been the intention of the Court of Justice’ ruling. After all, the entrepreneur will then be ‘punished’ twice or thrice. The entrepreneur, for example, does not get deduction of input tax for the same goods and moreover, instead of being able to apply the zero rate, has to pay 6% or 21% VAT to the Tax Authorities. That would be a double charge.

The basic premise should therefore be that the Tax Authorities must choose from the three options. The Tax Authorities must refuse either the deduction of input tax, or refuse to apply the zero rate or refuse to grant the refund. That this should be the point of departure also follows from the way in which the Court of Justice has formulated the answer to the stated prejudicial questions. In answering these questions, the Court of Justice includes “refusal of the right to deduction, exemption or refund of the tax on the added value” (underlining ML). By using the word ‘or,’ the Court of Justice shows that a choice must be made from the three options.

This reading/explanation of the Court of Justice’s ruling on the decision to be made is also shared by A-G Ettema in her conclusion of 1 February 2016.

Scope of ‘knew or should have known’

I have already explained that ‘knew or should have known’ of the VAT fraud has considerable consequences for an entrepreneur. The entrepreneur may lose his right to deduct input tax or to apply the zero rate. But can this case law of the Court of Justice be applied one on one in every situation? I wonder.

What if a tax consultant or a lawyer assists a foreign entrepreneur in a Dutch VAT fraud case. This tax consultant or lawyer will send a bill to the entrepreneur in question. It is likely that the service provider knew or should have known of the possible fraud being committed by his client. After all, the service provider will have received procedural documents with an explanation of the suspicion (if it is a criminal case) or the corrections by the Tax Authorities (if it concerns a fiscal correction and a fine). Can the service provider still be ‘careless’ in his declaration in applying the zero rate and send it to his client? Can the service provider be confronted with the refusal to deduct input tax for, e.g. the paper that the declaration is printed on, or the pen he used for his signature?

The Court of Justice has not given a definite answer to these questions yet. The procedures that have been presented to the Court increasingly looking like ‘genuine’ cases of fraud. The inspector and also the prosecutor, like to quote the phrase, ‘Surely it could not be that…’. I think that phrase equally applies to this. Surely it could not be that a service provider is confronted with the case law of the Court of Justice in the area of VAT fraud and therefore loses his right to apply the zero rate or to deduct input tax because he provided legal representation to an entrepreneur who is suspected of/confronted with VAT fraud.


 VAT fraud is a cause of frustration to both the European Union and the member states. With assistance of the Court of Justice, every possible effort is being made to reduce VAT fraud and, in the best-case scenario, to prevent it. Although a distinction is made here between ‘good’ and ‘bad’ entrepreneurs, this distinction is very flimsy. Only an entrepreneur who did not know or could not have known that VAT fraud was taking place will be immune from this problem.

 It is therefore also important that even if entrepreneur is doing everything right himself, but he does know or should have known that one of the links in his chain is committing VAT fraud, the entrepreneur will not get off scot free. He knows or should know of fraud and can therefore also be confronted with the adverse consequences, namely:

  • refusal of the application of the zero rate, in which case the entrepreneur still has to pay the regular rate of 6% or 21% to the Tax Authorities, or
  • refusal of the right to deduction of input tax, in which case the entrepreneur must pay back VAT deducted in advance, or
  • refusal of the refund for number acquisition, in which case the entrepreneur has paid the VAT but does not have it refunded.

Due to this hard line in the case law, the core of the discussion with the Tax Authorities in VAT fraud cases will increasingly focus on the question of whether the entrepreneur ‘knew or should have known’ of the VAT fraud. So far, these concepts have not been given sound definitions, so there is room for the entrepreneur to escape the adverse consequences of VAT fraud in his chain.

[1] Dr. R.A. Wolf, LLM, Carrouselfraude, Fiscaal Wetenschappelijke Reeks (Carrousel Fraud, Fiscal Science Series), no. 15, SDU publishers, chapter 3.

Marloes Lammers, Attorney at Law


Reduction of the default penalty: how to achieve that?

Every year, millions of Dutch people receive a request from the Tax Authority to declare their income by filing a tax return. This declaration must be submitted within a period set by the inspector (usually by 1 April). A taxpayer may request an extension. If the declaration is not received on time, the inspector will send a reminder. If the taxpayer still does not respond or responds too late, the inspector may impose a default penalty. This default penalty can be a substantial amount. If you or your client has received a default penalty, read here how – under what conditions – that penalty can be significantly reduced.

Stressed Man At Desk In Home Office With Laptop

Obligation to file a tax return

For income tax and corporate tax, a taxpayer is invited by the inspector to make a declaration. The taxpayer is then obliged (AWR, Article 8) to respond to this to this invitation. The deadline for this is at least one month. In practice, this means that the income tax return must have been filed before 1 April. This year taxpayers were given a longer deadline, namely until 1 May. A corporate tax return generally has to be filed before 1 June. A taxpayer and/or his tax consultant may ask the inspector to extend the deadline for filing the income tax and/or corporate tax return (AWR, Article 10).

If the inspector has not received the tax return before the end of the deadline, the taxpayer will be sent a reminder (AWR, Article 9). In this reminder, the inspector will provide the taxpayer with an additional deadline for filing the tax return. If the taxpayer still does not file the tax return form or is late in doing so, the inspector may impose a penalty. That penalty may be a default penalty or a financial penalty.

A default penalty is imposed if a tax return is not filed or not filed on time. If a tax return is intentionally not filed, the inspector may impose a financial penalty. This blog examines the default penalty for not filing, or the late filing of, tax returns in more detail.

Default penalty

If the tax return is not filed, or filed late, the inspector may impose a default penalty. In order to be able to do this, the inspector, as already mentioned earlier, will have already reminded the taxpayer to file a tax return. If the taxpayer ignores this reminder as well, he is in default.

Article 67a of the AWR stipulates that the maximum amount of the default penalty for not filing, or late filing of, the tax return is € 5,278. Further requirements connected to imposing a default penalty are set out in more detail in the Administrative Fines (Tax and Customs Administration) Decree (BBBB).

Paragraph 21 of the BBBB regulates that the inspector will impose a default penalty of 7% of the maximum, i.e. € 369.46, if the taxpayer has not filed, or is late filing, the income tax return. If it is a company that has not filed, or is late filing, its corporate tax return, the default penalty will be 50% of the maximum, € 2,639.

Absence of all blame

The inspector can and may not impose a default penalty if the taxpayer cannot be held responsible (BBBB, paragraph 4). If the inspector only realises this during the objection phase, he will render the imposed default void. The reasoning behind this is that if the taxpayer cannot be held responsible, he has also not been in default. When is the taxpayer at fault? Who has to prove that?

The burden of proof, in the sense of demonstrating that there is an ‘absence of all blame’ rests with the taxpayer. He must present the facts and circumstances on the basis of which it can be concluded that, under the given circumstances, he has tried to ensure in all reasonableness that the tax return was filed on time (HR 15 June 2007, no. 42687, ECLI:NL:HR:2007:BA7184).

It follows from case law that it is difficult for a taxpayer to tackle this burden of proof. In the majority of cases, an appeal made by the taxpayer based on the ‘absence of all blame’ is rejected by the tax court.

One example of where the appeal was granted concerned a taxpayer who had not thought of having to file a tax return during his illness. The ’s-Hertogenbosch Court ruled that the taxpayer could not be held responsible for filing the tax return late. This ruling concerned both the circumstance that the taxpayer had not thought of filing the tax return and the circumstance that he had not made any arrangements for a ‘replacement’ before he became ill. In the case of the latter, it was important that the taxpayer had, in fact, been caught unawares by a hernia, the necessary operations and the duration of his illness.

Another example of a successful appeal based on the absence of blame is the company that had engaged a consultant to file the corporate tax return on time. This consultant had asked the inspector for an extension for filing the tax return, using a new software package. It transpired later on that an incorrect tax number had been used. On receipt of the reminder (a reminder had been sent first) and the final notice, the company contacted its consultant. In turn, this consultant phoned the tax information line. The tax information line employee informed the consultant that without any notice to the contrary, he could assume that the reminder had been wrongly sent. Despite this, when calculating the corporate tax, a default penalty was imposed. The company objected to this. The court and the court are of the opinion that, considering the consultant’s responses, the company could assume that the reminder and the final notice had been wrongly sent. Because the company reacted decisively to the receipt of the reminder and the final notice, the court and supreme court ruled that the company acted with the due care reasonably expected of it. The company, according to the court and the supreme court, did not have to go so far as to check the statements of its consultant. The default penalty was rendered void.

 The imposition of a default penalty should be done on an individual basis

Proving an ‘absence of all blame’ is subject to strict testing. In practice, tax payers often appeal on this basis to no avail. Nevertheless, imposing a default penalty should be done on an individual basis. The BBBB affords the inspector some freedom in determining the amount of the default penalty. That freedom may or may not work in the taxpayer’s favour.

If a taxpayer consistently neglects to file the tax return time and time again, the inspector may increase the default penalty to the maximum of € 5,278 (BBBB, paragraph 21.6). This increase is higher for the income tax than it is for the corporate tax, because the starting points for both taxes are different.

The taxpayer who has received a warning from the inspector that the tax return has yet to be filed has three options: respond on time, respond late or not respond. If the taxpayer does not file the tax return within the additional period, but does so before the inspector calculates the assessment or decides on an objection, the inspector will reduce the default penalty (BBBB, paragraph 21. 8, BBBB). The taxpayer will then be given a default penalty of 1% of the maximum (€ 52.78) for the income tax and 5% of the maximum (€ 263.90) for the corporate tax.

Work agreements

It has now transpired that the Tax Authority and the Ministry of Finance have made other agreements than those provided laid down in the BBBB. These work agreements were initially not announced. To force this announcement, a request was submitted under the Government Information (Public Access) Act (WOB), with success. This WOB request ensures that the government, in this case the Tax Authority, must announce the work agreements on the reduction of default penalties. The Tax Authority has now done this.

These work agreements pertain to the situation that a taxpayer has not filed, or has been late filing, the income tax return and/or corporate tax return.

If the taxpayer has not filed the tax return and he then receives an estimated assessment, he can respond to this in two ways. First, he can object to the estimated assessment. That objection will then be processed by the inspector. The second option would be for the taxpayer to go ahead and file the tax return. The inspector will also regard such action as an ‘objection’.

In the first situation (objecting), the inspector will ask the taxpayer to still complete and file the tax return. The taxpayer will be given six weeks to do this. If the taxpayer fulfils this request, the inspector will assume that the taxpayer will improve his tax compliance behaviour (in the future). The imposed default penalty after the tax return has been filed (in principle, € 369.46) will then be reduced to € 49. In the case of corporate tax, the default penalty (in principle, € 2,639) will be reduced to € 246.

In the second situation (late filing of the tax return), the default penalty will be immediately reduced to € 49 (income tax) and € 246 (corporate tax).

It seems that a taxpayer who only files the tax return during the objection phase is treated better than the taxpayer who files the tax return before the estimated assessment is calculated, (although late). Paragraph 21.8 of the BBBB stipulates that in that situation a default penalty of 1% – € 52.78 – (income tax) or 5% – € 263.90 – (corporate tax) will be imposed.

To counter this unequal treatment, it is incorporated into the work agreements that in this situation the default penalty will also be reduced to € 49 (income tax) and € 246 (corporate tax). The Tax Authority’s system should process this automatically.

By filing the income tax and/or corporate tax return late, a taxpayer can reduce the imposed default penalty considerably. So, a big financial gain for little effort.


A taxpayer who is invited to file a tax return, must file it on time. If the taxpayer does not do this, he will receive a reminder to do so. If the taxpayer ignores this, the inspector may impose a default penalty. This default penalty is generally € 369.46 (income tax) or € 2,639 (corporate tax).

If the taxpayer cannot be held responsible for not filing the tax return, or for not filing it on time, a default penalty cannot be imposed or the imposed default penalty must be rendered void. The burden of proof of this ‘absence of all blame’ is difficult. However, this does not make the case hopeless for the taxpayer. The default penalty can be substantially reduced in a relatively simple way. How? By simply filing the tax return form. The inspector will then assume that the taxpayer has improved his tax compliance behaviour and as a reward for this the default penalty will be reduced to € 49 (income tax) of € 246 (corporate tax).

Mr. M.H.W.N. (Marloes) Lammers