Fault by the tax authorities: could you be entitled to compensation?

An error by the tax authorities does not merely give rise to a challenge to the tax. In certain situations, it may also give entitlement to compensation where it has caused the taxpayer a distinct loss.

The compensation route remains less well known than conventional tax litigation, but it can prove particularly useful where the conduct of the tax authorities has had financial, professional or personal consequences that cannot be remedied simply by discharging the tax.

The liability of the State may thus be engaged on account of faults committed in the assessment or collection of tax. Since the Krupa judgment (Conseil d'État, Section, 21 March 2011, no. 306225), simple fault may suffice, provided that a loss and a direct causal link between the fault and that loss can be demonstrated.

The key is therefore to distinguish tax litigation from compensation litigation, and then to identify the losses that can genuinely be compensated.

1. Liability of the tax authorities: which faults may give entitlement to compensation?

Simple fault by the tax authorities may suffice

For a long time, establishing the liability of the tax authorities required proof of a fault of particular gravity.

This requirement has gradually been abandoned.

Since the Krupa decision (Conseil d'État, Section, 21 March 2011, no. 306225), a fault committed by the tax authorities in the course of assessment or collection is capable of engaging the liability of the State if it has directly caused a loss.

The situations concerned are varied.

The following, among others, may constitute faults:

• issuing an undue assessment for collection;
• an unlawful refusal of approval;
• failure by the assessment department to forward a request for a stay of payment to the collection department;
• an ex officio assessment carried out irregularly;
• the application of legislation that does not comply with European Union law;
• or the refusal to refund a VAT credit on the basis of administrative guidance that does not comply with EU law.

More broadly, any unlawful conduct on the part of the tax authorities is capable of constituting a fault engaging the liability of the State, and neither the difficulty of the legal question nor the uncertainty of the case law can, in itself, justify the error committed.

A compensation claim does not replace tax litigation

The taxpayer may not, however, use a liability action to obtain indirectly what should have been sought through tax litigation.

The compensation route therefore does not allow a claim for redress of the loss resulting solely from the payment of undue tax where that claim has the same purpose as an action seeking discharge of the assessment.

By contrast, this route remains open to remedy a loss distinct from the payment of the tax.

It may even be pursued without the taxpayer having first obtained discharge of the assessments concerned, provided that the claim seeks redress for an independent harm attributable to the wrongful conduct of the tax authorities.

This distinction is essential: a liability action is not a means of relitigating the tax, but of remedying the harmful consequences of a fault by the tax authorities.

2. Compensable tax-related loss: which consequences can be remedied?

The taxpayer must demonstrate a real and certain loss

Establishing a fault is not enough.

The taxpayer must also prove the reality of the loss relied upon and, when bringing the matter before the court, quantify its amount. The loss must be certain.

The losses that may be compensated can be very varied in nature.

The case law has, in particular, accepted compensation for:

• the loss of a business following its liquidation;
• a fall in turnover;
• non-pecuniary loss;
• disruption to living conditions.

In certain situations, company directors may also obtain redress for personal losses directly caused by faults committed in respect of their company, notably damage to their professional reputation or loss of salary.

Assessing the loss is therefore a central stage in any compensation claim.

There must be a direct link between the fault and the harm

The taxpayer must also demonstrate that the loss for which redress is sought is directly attributable to the fault committed by the tax authorities.

This condition is essential.

The court examines whether the fault was genuinely the direct cause of the harm alleged. Where other circumstances have contributed to the loss, the liability of the tax authorities may be reduced or excluded.

The tax authorities may, in particular, rely on the conduct of the taxpayer or the claimant as grounds for reducing or excluding their liability.

The compensation strategy must therefore reconstruct the chronology of events precisely and establish the link between the fault identified and the harm for which redress is sought.

3. Liability action against the tax authorities: what procedure should be followed?

A prior claim for compensation must be submitted to the tax authorities

Before bringing proceedings before the administrative court, the taxpayer must submit a prior claim for compensation to the tax authorities.

A compensation application that has not been preceded by such a claim is inadmissible.

The claim must set out the faults alleged, identify the losses suffered and quantify the amount of compensation sought.

This quantification is decisive, since the court cannot award a sum greater than that claimed. Representation by a lawyer is also required before the administrative court, except for local authorities.

Limitation must also be examined carefully.

Article L. 190 A of the LPF lays down specific rules limiting the period in respect of which compensation may be obtained. The date on which the existence of the compensation claim became apparent to the claimant therefore plays a decisive role.

Identifying the right court and building the case for compensation

Litigation concerning the liability of the tax authorities is not exclusively a matter for the administrative courts.

The competent court depends, in particular, on the nature of the tax concerned, the fault alleged and whether it relates to assessment or collection.

For faults that are separable from the procedures for assessing or collecting tax, the administrative courts have jurisdiction, whatever the tax concerned. A personal fault by an officer may, for its part, fall within the jurisdiction of the ordinary courts where the officer's personal liability is sought.

The involvement of a tax lawyer thus makes it possible to identify the appropriate legal basis for the action, determine the competent court, document the fault, quantify the losses precisely and establish the causal link between the conduct of the tax authorities and the harm suffered.

The firm supports taxpayers faced with a fault by the tax authorities, analysing the possibilities for compensation, preparing the prior claim and, where necessary, bringing proceedings before the competent court. The aim is not to confine the taxpayer's defence to challenging the tax alone where the conduct of the tax authorities has caused distinct consequences that may give rise to compensation.