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

An error by the tax authorities may provide grounds for challenging a tax assessment. In certain situations, it may also give rise to a right to compensation if it has caused the taxpayer a separate loss.

The compensation route is less well known than ordinary 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 by a mere discharge of the tax.

The State may thus be held liable for faults committed in the assessment or collection of tax. Since the Krupa decision (CE, sect., 21 March 2011, no. 306225), ordinary fault (faute simple) may suffice, provided that a loss and a direct causal link between the fault and that loss are shown.

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

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

Ordinary fault (faute simple) by the tax authorities may suffice

For a long time, holding the tax authorities liable required proof of a fault of particular seriousness.

This requirement has gradually been abandoned.

Since the Krupa decision (CE, sect., 21 March 2011, no. 306225), a fault committed by the tax authorities in the course of assessment or collection operations may render the State liable if it has directly caused a loss.

The situations concerned are varied.

Faults may include in particular:

• issuing for collection a tax that was not due;
• an unlawful refusal of approval;
• failure by the assessment department to pass on a request for a stay of payment to the collection department;
• an ex officio assessment irregularly carried out;
• the application of a law incompatible with European Union law;
• or a refusal to repay a VAT credit based on administrative doctrine incompatible with EU law.

More broadly, any unlawful conduct by the tax authorities may constitute a fault rendering the State liable, without the difficulty of the legal question or uncertainty in the case law being enough, on its own, to justify the error made.

A compensation claim does not replace tax litigation

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

The compensation route therefore cannot be used to seek redress for the sole loss resulting from the payment of a tax not due where that claim has the same purpose as an action seeking the discharge of the tax.

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

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

This distinction is essential: a liability action does not serve to re-run the tax case, but to make good the harmful consequences of a fault by the tax authorities.

2. Compensable loss: which consequences can be compensated?

The taxpayer must show a real and certain loss

Establishing a fault is not enough.

The taxpayer must also establish that the alleged loss was actually suffered and, when bringing the matter before the court, quantify it. The loss must be certain.

The losses that may be compensated can be of very different kinds.

The case law has in particular accepted compensation for:

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

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

Assessing the loss is therefore a central stage of the compensation claim.

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

The taxpayer must also show that the loss for which compensation 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 damage claimed. Where other circumstances contributed to the loss, the tax authorities’ liability may be reduced or excluded.

The tax authorities may in particular rely on the conduct of the taxpayer or 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 damage for which compensation is sought.

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

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

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

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

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

This quantification is decisive, since the court cannot award a sum greater than the amount claimed. Representation by a lawyer is also required before the administrative court.

The limitation period must also be examined carefully.

Article L. 190 A of the French Tax Procedures Code lays down specific rules limiting the period for which compensation may be obtained. The date on which the claimant became aware of their entitlement to compensation 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 operations.

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

The involvement of a tax lawyer thus makes it possible to identify the relevant 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 damage suffered.

Based in Nice, the Valenor firm assists taxpayers who have suffered harm as a result of wrongful conduct by the tax authorities in analysing the possibilities of compensation, preparing the prior claim and, where necessary, bringing proceedings before the competent court.

Our objective is not to limit the taxpayer’s defence to challenging the tax alone where the conduct of the tax authorities has caused separate consequences that may give rise to compensation.

Bruno Gherardi
Tax lawyer in Nice - Cabinet Valenor