Penalties in VAT not so tough after all? Courts use more common sense than tax authorities

The additional tax liabilities provided for in Articles 112b and 112c of the VAT Act have raised concern among taxpayers for many years. Where irregularities are found in tax returns – for example, an overstatement of VAT reimbursement – the tax office may impose a penalty on the taxable person of up to 30% of the understated tax liability or of the overstated reimbursement. However, the regulations do not state precisely when or in what amount the authorities are to impose a penalty, leaving the tax office with room for interpretation. An analysis of the authorities’ practice shows that there are often situations in which these penalties are imposed automatically, without taking into account the circumstances of the case at issue or the individual situation of the taxable person.

Fortunately, administrative courts and the Court of Justice of the European Union (CJEU) repeatedly remind officials that penalties in VAT must be applied in accordance with the principle of proportionality. What arguments are presented by the courts, and what is worth including as defence against the adverse financial consequences arising from Articles 112b and 112c of the VAT Act?

What kind of irregularities in VAT may result in penalties?

Article 112b of the Polish VAT Act provides for the possibility of imposing the so-called additional tax liability on a taxable person if any irregularities are found in that taxpayer's VAT returns. The penalty may be imposed, among others, in the following situations:

• an understatement of the tax liability 
• an overstatement of the VAT reimbursement 
• an overstatement of the amount of input tax to be carried over to the following accounting period

As a general rule, the additional tax liability is 30% of the misstated amount. Nevertheless, the tax authorities have the power to reduce the penalty to 20% (e.g. in the case of submitting a corrected tax return and fulfilling certain conditions) or to impose a higher penalty of 100% (in particular, in situations involving tax deductions related to the so-called ‘blank invoices’).

Unfortunately, the grounds for imposing specific levels of penalties are not precisely defined. This gives rise to numerous disputes between taxpayers and the authorities, which frequently end up in the Supreme Administrative Court.

Do courts use common sense in the assessment of additional VAT liabilities?

Since the legislation contains no detailed guidance concerning the application of the regulations referring to the additional tax liability, it is worth looking at the judgments of administrative courts. They are one of the best sources of information in this respect, as court judgments define the circumstances that should be taken into account and determine when the imposition of a penalty on a taxpayer constitutes a disproportionate measure.

The Supreme Administrative Court: the Constitution and international law set out what must be taken into account when assessing the legitimacy of VAT penalties

The judicial decisions of the Supreme Administrative Court (Polish: Naczelny Sąd Administracyjny – NSA) quite clearly specify the criteria that the tax authorities should take into account in making decisions concerning penalties. The courts point out that the authorities should take into account the following:

• the circumstances of the irregularities,
• the type and seriousness of the breach of the taxpayer’s obligations which caused the irregularities,
• the type, seriousness, and frequency of earlier irregularities related to tax liabilities which have not expired,
• the misstated amount, including the understated tax liability, the overstated VAT reimbursement, or the overstated input tax,
• measures taken by the taxable person following the establishment of the irregularities to ameliorate the effects of errors in tax returns.

Although the provisions of the VAT Act do not lay down strict criteria for the imposition of penalties, the rulings of the Supreme Administrative Court provide important guidance for the tax authorities and taxable persons alike. However, as is often the case with tax matters, the final assessment of the situation and of the adequacy of the penalty charged should be made after an analysis of all the circumstances of a particular case.

Judgment of the Supreme Administrative Court of 3 December 2025, case no. I FSK 2053/22.

The Provincial Administrative Court in Wrocław: no penalties for taxpayers who settle invoices as per their content

A recent judgment of the Provincial Administrative Court (Polish: Wojewódzki Sąd Administracyjny – WSA) in Wrocław confirms the topicality of the problem. In this judgment, the Court ruled that the additional tax liability under Article 112b of the VAT Act is not to be imposed automatically, as each matter should be assessed on a case-by-case basis. 

Here, the Court also emphasised that the penalty should not be imposed on a taxpayer whose actions are characterised by a lack of evidence of tax evasion or deliberate conduct aimed at gaining an unfair tax advantage. It means that a taxable person who accounted for VAT on the basis of an invoice delivered by a counterparty – even if the legitimacy of that invoice was subsequently challenged – should not receive a penalty if they acted in good faith and were unaware of any irregularities. Therefore, it is crucial for the tax authorities to determine whether the conduct of the taxable person constituted a conscious and deliberate attempt to abuse the law or to gain a tax advantage.

Judgment of the Provincial Administrative Court in Wrocław of 23 June 2026, case no. I SA/Wr 267/26 (non-final).

The Supreme Administrative Court: the authorities may impose penalties for irregularities in VAT arising from failure to exercise due care

Even though courts side with taxpayers who were unaware of any irregularities in invoices received from their counterparties, they set certain limits in such cases. The Supreme Administrative Court points out that the penalties under Article 112b of the VAT Act are not precluded in situations where the irregularities found by the tax authorities arise from the fact that the taxable person failed to exercise due care in the settlement of VAT. The fact of no intention to evade tax does not automatically protect the taxable person from a penalty. 

The decisive factors are not the taxpayer’s intentions, but the size, nature, and effects of the irregularities found. If the irregularities in VAT are significant to such an extent that they might have a negative impact on the proper collection of tax, they might be treated as tax evasion, even if they arise from failure to exercise due care.

Judgment of the Supreme Administrative Court of 6 May 2026, case no. I FSK 768/23.

The Supreme Administrative Court: Do you issue invoices which do not document the actual services provided? You can expect VAT penalties

A judgment which may serve as a kind of case study illustrating when the tax authorities may effectively charge a VAT penalty (including in the maximum amount of 30% of the understated tax liability or the overstated refund) was handed down by the Supreme Administrative Court in 2025. In this ruling, the Court stated that, since the taxpayer had issued invoices relating to the hiring out of staff which did not document the actual services provided, the tax authority rightfully imposed an additional tax liability.

A key factor was that the overstated input tax was not a consequence of an unintended error, but of inaccurate settlement of the disputed transactions which misrepresented the actual situation. In the Court’s assessment, this action pointed to deliberate breach of regulations and provided reasonable grounds for imposing VAT penalties.

Judgment of the Supreme Administrative Court of 10 September 2025, case no. I FSK 487/25.

CJEU: VAT penalties must be proportional

Importantly, the administrative court judgments referred to above are consistent with the case-law of the Court of Justice of the European Union. In one of the cases it considered, the Court emphasised that tax penalties must be imposed in line with the principle of proportionality. It means that the tax authorities are obliged to make sure that the amount of the penalty conforms to the nature and seriousness of the irregularity found. As such, the penalty cannot be imposed automatically or in isolation from the circumstances of a specific case.

Judgment of the CJEU of 15 April 2021 in Case C-935/19.

Due care and a reasonable approach are key to avoiding VAT penalties

It would appear that, in many cases, to avoid the risk of the VAT penalties laid down in Articles 112b and 112c of the VAT Act, it should be sufficient to adopt a rational approach to accounting for VAT and provide a true and fair view of the course of transactions. 

However, practice shows that the tax authorities often take a rigid and pro-fiscal attitude to the charging of penalties, and taxpayers are frequently left to defend themselves by becoming involved in tax litigation and asserting their rights before administrative courts. We can therefore only hope (perhaps in vain) that the tax authorities will develop a more flexible approach over time. In the meantime, tax advisors and experts are here to support you in the proper assessment of risk and potential defence against unjustified action by the tax authorities.