© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
B3. Supply chain fraud
EFFECTS OF SUPPLY CHAIN FRAUD
Legal basis for effects
- General principle against abuse rather than conforming construction
"[23]More recently, the CJEU has moved away from describing the Halifax abuse of rights principle as deriving from the meaning of the EU instrument and hence as requiring a conforming interpretation to be made of the relevant domestic legislation. In the VAT sphere there was always a risk of proving too much; if transactions forming part of an MTIC fraud chain were not "economic activity" or the fraudster was not a "taxable person acting as such" what would that mean for the output VAT that had been accounted for to the tax authorities by suppliers in the chain?...
[24] The Court therefore concluded that the refusal of the VAT credit was not dependent on there being some wording in the Dutch domestic law that could be given a conforming interpretation to bring about that result. The same answer was given to questions referred by the Irish Supreme Court in Cussens and others v Brosnan (Case C-251/16) judgment of 22 November 2017 ECLI:EU:C:2017:881 [2018] STC 1957 ('Cussens'). The CJEU restated one of the questions referred as asking "whether the principle that abusive practices are prohibited must be interpreted as being capable, regardless of a national measure giving effect to it in the domestic legal order, of being applied directly in order to refuse to exempt sales of immovable goods, such as the sales at issue in the main proceedings, from VAT.": [25]. The CJEU drew a distinction between directives which do not have horizontal direct effect and the effect of settled case law, holding that the principle that abusive practices are prohibited, as applied to the sphere of VAT by the case-law stemming from the judgment in Halifax, "displays the general, comprehensive character which is naturally inherent in general principles of EU law": ([31]). The principle could therefore be relied on against a taxable person to refuse him a right to exemption from VAT, even in the absence of provisions of national law providing for such refusal.
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[39]...Mr Butt's ground of appeal is inconsistent with the way that the CJEU has described how the national courts should apply the Halifax principle as further clarified by the Court in Kittel, Italmoda and Cussens. Those cases establish that the fact that the taxpayer fraudulently carried out the transactions in respect of which the VAT credit is claimed does not mean that those transactions are not "economic activity" or that he is not a "taxable person acting as such". It is not the meaning of those specific terms in the Sixth Directive that is affected by the Halifax line of cases; the principle is more subtle than that. The abuse of right principle is, according to Cussens, "naturally inherent in general principles of EU law" as a free-standing principle that applies irrespective of the ability of the wording of the national provisions to be subjected to a conforming interpretation." (Butt v. HMRC [2019] EWCA Civ 554, Rose, Gross, Jackson LJJ)
- Abuse case law and anti-fraud case law are part of the same principle
"[76] It follows that the general principle that abusive practices are prohibited must be relied on against a person where that person invokes certain rules of EU law providing for an advantage in a manner which is not consistent with the objectives of those rules. The Court has thus held that that principle may be relied on against a taxable person in order to refuse him, inter alia, the right to exemption from VAT, even in the absence of provisions of national law providing for such refusal (see, to that effect, judgments of 18 December 2014, Schoenimport Italmoda Mariano Previti and Others, C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2455, paragraph 62, and of 22 November 2017, Cussens and Others, C‑251/16, EU:C:2017:881, paragraph 33)." (T Danmark C-116/16)
"[33] Therefore, the principle that abusive practices are prohibited may be relied on against a taxable person to refuse him, inter alia, the right to exemption from VAT, even in the absence of provisions of national law providing for such refusal (see, to that effect, judgment of 18 December 2014, Schoenimport ‘Italmoda’ Mariano Previti and Others, C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2455, paragraph 62).
[34] Contrary to the contentions of the appellants in the main proceedings, the fact that the situation that gave rise to the judgment cited in the preceding paragraph concerned cases of fraud does not lead to the conclusion that that case-law is applicable only to such cases, and not to cases of abuse. As is apparent, in particular, from paragraphs 56 and 57 of the judgment of 18 December 2014, Schoenimport ‘Italmoda’ Mariano Previti and Others (C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2455), in reaching the finding set out in the preceding paragraph, the Court relied, in particular, on its settled case-law, recalled in paragraphs 27 and 32 above, which relates both to cases of fraud and to situations involving abusive practices." (Cussens C-251/16)
- Not a penalty
"[89] The impugned measures do not concern the imposition of tax fines or surcharges but the obligation to pay reassessed VAT liabilities. The supplementary tax assessments were issued on the grounds that Italmoda had not complied with the conditions for applying the exemption from, or deduction or refund of VAT for intra-Community supplies. The VAT-system for such intra-Community supplies is regulated by the Sixth Directive (see paragraphs 56-57 above). The Court agrees with the Government (see paragraph 65 above) that the supplementary tax assessments were the result of a tax regime that applied only to a target group – namely, taxable persons wishing to benefit from this VAT-system." (Italmoda Mariano Previti ECHR 16395/18 (2025))
"[56] Contrary to the assertions of Emsland-Stärke, the obligation to repay refunds received in the event that the two constituent elements of an abuse are established would not breach the principle of lawfulness. The obligation to repay is not a penalty for which a clear and unambiguous legal basis would be necessary, but simply the consequence of a finding that the conditions required to obtain the advantage derived from the Community rules were created artificially, thereby rendering the refunds granted undue payments and thus justifying the obligation to repay them." (Emsland-Stärke C-110/99)
"[40] The Court has repeatedly held that the refusal to allow a credit does not of itself amount to the imposition of a penalty by the tax authority. The CJEU held in Emsland-Stärke that there needs to be a clear and unambiguous basis for imposing a penalty in addition to disallowing the benefit fraudulently claimed..." (Butt v. HMRC [2019] EWCA Civ 554, Rose, Gross, Jackson LJJ)
Denial of right to deduct input VAT
"[42] That being said, the fight against fraud, tax evasion and potential abuse is an objective recognised and encouraged by the VAT Directive, and the Court has repeatedly held that individuals may not fraudulently or abusively rely on EU law. Therefore, it is for national authorities and courts to refuse the benefit of the right to deduct VAT if it is established, based on objective evidence, that this right is being invoked fraudulently or abusively (Order of 3 September 2020, Vikingo Fővállalkozó, C-610/19, EU:C:2020:673, paragraph 50 and the case law cited)." (Granulines Invest C-270/24)
- Question of denial only arises if transaction actually took place
"[26] Consequently, the fictitious nature of the delivery of goods or the provision of services is sufficient to deprive the recipient of the invoice relating thereto of the right to obtain the deduction of VAT.
[27] The question of whether the taxable person knew or should have known that he was participating in an operation involved in VAT fraud arises only, if applicable, when all the material and formal conditions of the right to deduct are met." (Klinka-Geo C-501/24)
- Upstream or downstream VAT fraud
"[28] If that is the case, the taxable person may only be denied the benefit of the right to deduct VAT if it is established, in view of objective evidence, that the taxable person himself committed VAT fraud or that he knew or should have known that he was participating in a transaction involved in such fraud committed by the supplier or another operator involved upstream or downstream in the chain of supplies or services (see, to that effect, Order of 9 January 2023, ATS 2003, C-289/22, EU:C:2023:26, paragraphs 51 and 52)." (Klinka-Geo C-501/24)
- Refusal of right due to lack of information and refusal due to fraud treated as equivalent
"[35] The position could be different if the effect of breach of failure to satisfy formal requirements is to prevent the production of conclusive evidence that the substantive requirements have been satisfied (judgment of 28 July 2016, Astone, C‑332/15, EU:C:2016:614, paragraph 46 and the case-law cited). Refusal of the right to deduct depends more on the lack of information necessary to establish that the substantive requirements have been satisfied than it does on failure to comply with a formal requirement (see, to that effect, judgment of 11 December 2014, Idexx Laboratories Italia, C‑590/13, EU:C:2014:2429, paragraphs 44 and 45).
[36] Similarly, the right to deduct may be refused, if it has been established, in the light of objective evidence, that that right is being invoked fraudulently or abusively (judgment of 19 October 2017, Paper Consult, C‑101/16, EU:C:2017:775, paragraph 43)." (Dobre C-159/17)
Denial of right to exemption/zero-rating
- Basis for refusal: Article 131 + competence to prevent evasion
"[48] The Member State where dispatch of the goods began may therefore, if necessary, refuse to grant an exemption pursuant to its competence under Article 131 of the VAT Directive and for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any evasion, avoidance or abuse (see, to that effect, judgment of 7 December 2010, R., C‑285/09, EU:C:2010:742, paragraph 51)." (Climate Corporation Emissions Trading C-641/21)
"[55] Having regard to all the foregoing considerations, the answer to the question referred is that, in circumstances such as those at issue in the main proceedings, in which an intra-Community supply of goods has actually taken place, but when, at the time of that supply, the supplier concealed the identity of the true purchaser in order to enable the latter to evade payment of VAT, the Member State of departure of the intra-Community supply may, pursuant to its powers under the first part of the sentence in Article 28c(A) of the Sixth Directive, refuse to allow an exemption in respect of that transaction." (R C-285/09)
- Right to exemption can be made conditional upon good faith
"[50] Consequently, in the event that the purchaser in the case before the referring court has committed tax fraud, it is justifiable to make the vendor’s right to exemption from VAT conditional upon its good faith.
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[54] If the referring court were to reach the conclusion that the taxable person concerned knew or should have known that the transaction which it had carried out was part of a tax fraud committed by the purchaser and that the taxable person had not taken every step which could reasonably be asked of it to prevent that fraud from being committed, there would be no entitlement to exemption from VAT." (Mecsek-Gabona C-273/11)
Query why the effect of participation in fraud by the supplier should be that the customer is charged VAT.
- Exemption as a right
"[26] The Court considers that, as the Commission of the European Communities has correctly argued, the principle that the burden of proving entitlement to a tax derogation or exemption rests upon the person seeking to benefit from such a right is to be viewed as being within the limits imposed by Community law. Thus, for the purpose of applying the first subparagraph of Article 28c(A)(a) of the Sixth Directive, it is for the supplier of the goods to furnish the proof that the conditions for exemption referred to in paragraph 23 of this judgment are fulfilled." (Twoh International C-184/05)
- Shared taxing competence of intra-EU supply of goods
"[46] As regards the rules governing the former, any intra-Community supply of goods, for the purposes of Article 138 of the VAT Directive, has as its corollary an intra-Community acquisition of those goods for the purposes of Article 2(1)(b) of that directive. The intra-Community supply and the intra-Community acquisition, which forms a second chargeable event, are one and the same economic transaction, in respect of which fiscal competence is shared between the Member State where dispatch of goods began and the Member State of arrival of those goods, which are responsible, respectively, for the exercise of the powers conferred on them (see, to that effect, judgment of 27 September 2007, Teleos and Others, C‑409/04, EU:C:2007:548, paragraphs 22 to 24).
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[49] By contrast, that system of intra-Community transactions is not applicable to cross-border supplies of services within the European Union, in respect of which only one Member State, determined under the provisions of the VAT Directive, has fiscal competence." (Climate Corporation Emissions Trading C-641/21)
Place of supply
- Fraudulent failure to identify real customer justifying refusal of exemption
"[50] The refusal of exemption in the case of non-compliance with an obligation provided for by national law – in this instance, the obligation to identify the person acquiring the goods and receiving the intra-Community supply – has a deterrent effect which is intended to ensure compliance with that obligation and to prevent any tax evasion or avoidance (see, by analogy, with regard to the withholding of a portion of the VAT which may be deducted, Profaktor Kulesza, Frankowski, Jóźwiak, Orłowski, paragraph 28).
[51] It follows from this that, in circumstances such as those at issue in the main proceedings, the Member State of departure of the intra-Community supply may refuse to apply the exemption pursuant to its powers under the first part of the sentence in Article 28c(A) of the Sixth Directive and for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any evasion, avoidance or abuse." (R C-285/09)
- Fraud by recipient has no effect on place of supply as it is not a right
"[41] However, in the first place, unlike the cases which gave rise to the case-law recalled in paragraph 40, the present case concerns not the reliance on a right, such as the right to an exemption in respect of an intra-Community supply of goods, but the determination of the place of a taxable transaction.
[42] An interpretation according to which, in the case of VAT evasion, the place of supply of services may be deemed to be in a Member State other than that determined under the provisions of the VAT Directive relating to the determination of the place of supply of services would run counter to the objectives and the general scheme of those provisions, as reflected in paragraphs 30 and 31 of this judgment." (Climate Corporation Emissions Trading C-641/21)
- Varying place of supply based on fraud has no legal basis
"[43] Such an interpretation would amount to varying the allocation of fiscal competence between the Member States as it emerges from those provisions. In a situation such as that in the present case, it would have the practical effect of transferring, in the absence of any legal basis, the fiscal competence of the Member State in which the recipient of the services concerned is established to the Member State in which the supplier of that service is established." (Climate Corporation Emissions Trading C-641/21)
Joint and several liability
- Recipient of supply may be made jointly liable for supplier's output tax and denied input recovery
"[53] Having regard to all of the foregoing considerations, the answer to the question referred is that Article 205 of the VAT Directive, read in the light of the principle of proportionality, must be interpreted as not precluding a national practice which imposes on a taxable person, recipient of a supply of goods for consideration, a joint and several obligation to pay the VAT due from the supplier of those goods, even though the recipient of that supply of goods was refused the right to deduct the input VAT due or paid on the ground that he, she or it knew or ought to have known that he, she or it was participating in VAT evasion."
- Joint liability and denial of right to deduct pursue distinct but complimentary objectives
"[53] In addition, the refusal of the right to deduct VAT and joint and several liability under Article 205 pursue two distinct and complementary objectives, consisting, respectively, of combating tax evasion and ensuring for the public exchequer the efficient collection of VAT from the most appropriate persons, in particular in a situation of evasion. To require the tax authorities to apply those measures alternatively would lead it to abandon, at least in part, one of those two objectives, which cannot be justified in the case of taxable persons who knew or ought to have known that they were participating in tax evasion." (Konreo C-276/24)
- Otherwise joint liability would not apply to persons who participated in fraud
"[51] As stated by the Appellate Tax Directorate and the Czech Government, the solution to the contrary, consisting in the inability of holding the taxable persons whose right to deduct VAT has been refused, jointly and severally liable under Article 205 of the VAT Directive, would imply that only taxable persons acting in good faith who have the right to deduct VAT on their taxable transactions, could be designated, pursuant to that article, as being jointly and severally liable for the payment of the tax that is due by the taxable person normally liable for it. That would result in taxable persons who have acted in good faith being treated in a less favourable manner than taxable persons who knew or ought to have known that they were participating in tax evasion." (Konreo C-276/24)
- No unjust enrichment of the tax authority (both amounts are due)
"[52] Lastly, as the European Commission stated at the hearing before the Court, the imposition on a taxable person receiving a supply of goods for consideration of a joint and several obligation to pay the VAT payable by the taxable person supplying those goods, in a situation such as that in the main proceedings, does not result in unjust enrichment of the tax authorities. By refusing, on the one hand, to the first taxable person, the right to deduct VAT in a situation where that taxable person knew or ought to have known that he, she or it was participating in tax evasion, and, on the other hand, designating that first taxable person as being jointly and severally liable for payment of the VAT due from the second taxable person, the tax authorities are merely taking measures which may enable them to obtain payment of the separate amounts of VAT due to them from those two taxable persons." (Konreo C-276/24)
Taxable amount
- Fraud does not justify a different approach to determining the taxable amount
"[25] It must be noted at the outset that, even though the prevention of tax evasion, avoidance and abuse is an objective recognised and encouraged by Directive 2006/112 (judgment of 12 November 2020, ITH Comercial Timișoara, C‑734/19, EU:C:2020:919, paragraph 39 and the case-law cited), the determination of the taxable amount of a transaction between taxable persons, for the purpose of Articles 73 and 78 of that directive, is not among the tools available to the Member States, under Article 273 thereof, for achieving that objective, in the sense that they could adopt, in case of fraud, an interpretation of those provisions different from that which should be adopted in the absence of fraudulent behaviour by taxable persons." (CB C-521/19)
De-registration
- De-registration of persons who perpetrate fraud themselves or participate in the fraud of another
"[31] Shortly before the hearing before us, the Court of Appeal (in a judgment given by Falk LJ with which Popplewell LJ and Moylan LJ agreed) released its decision in Impact Contracting Solutions Limited v HMRC [2025] EWCA Civ 623 ("Impact"). In that case, the Court of Appeal held, agreeing with the Upper Tribunal, that HMRC could, relying on Ablessio, de-register a company which had not itself fraudulently evaded VAT but had facilitated the VAT fraud of another in circumstances where the company knew, or should have known, that it was facilitating that other person's VAT fraud." (Elphysic Limited v. HMRC [2025] UKUT 236 (TCC), Rajah J and Judge Andrew Scott)
- Knowledge/means of knowledge only required where participating in fraud of another
"[59] It is, in our view, difficult to conceive of a more proximate involvement of a company in VAT fraud than its being the very means by which the fraud is being carried out. It would be inconsistent with the Ablessio principle to impose a requirement about the knowledge of the directors of the company in relation to VAT fraud in circumstances where it was the company's own VAT number that was the means by which the fraud was being carried out and where it was a critical design feature of the scheme that, as the FTT found, the directors of the company concerned were "in name" only. There is no need to establish that the directors knew or should have known that they were facilitating a fraud or that any other person was dishonest or fraudulent. A requirement to that effect in the circumstances of this case would seriously undermine the effectiveness of the Ablessio principle in meeting the objective of making it more difficult for fraudulent transactions to be carried out. It would, in our view, represent a simple opportunity to those seeking to secure the opposite outcome." (Elphysic Limited v. HMRC [2025] UKUT 236 (TCC), Rajah J and Judge Andrew Scott)
FRAUD
- Non-payment of VAT by supplier does not, of itself, constitute VAT fraud
"[54] Furthermore, it follows from the Court's case law that, insofar as the issuer of the invoice has duly fulfilled its VAT reporting obligations, the mere omission to pay the duly declared VAT cannot, irrespective of whether such omission was intentional or not, constitute VAT fraud (see, to that effect, judgment of 15 September 2022, HA.EN., C-227/21, EU:C:2022:687, paragraph 32 and the case law cited)." (Granulines Invest C-270/24)
- Intentionally not paying VAT declared not necessarily fraudulent
"[32] The Court has already held that, in so far as the taxable person has duly complied with his or her obligations to declare VAT, the mere failure to pay duly declared VAT cannot constitute VAT fraud, irrespective of whether such a failure is intentional or not (see, to that effect, judgment of 2 May 2018, Scialdone, C‑574/15, EU:C:2018:295, paragraphs 38 to 41).
[33] Therefore, a taxable person who is a judgment debtor facing financial difficulties and sells one of his or her assets in a statutory compulsory sale procedure in order to settle his or her debts, then declares the VAT due on that basis, but subsequently is unable, because of those difficulties, to pay that VAT in whole or in part, cannot be regarded as committing VAT fraud on that account alone. Consequently, the purchaser of such an asset, a fortiori, cannot be criticised in such circumstances on the basis that he or she knew or should have known that, in acquiring that asset, he or she was participating in a transaction connected with VAT fraud." (UAB Ha.En C-227/21)
- Does not need to be a risk of loss of tax revenue to justify refusal
"[56] In the third place, as regards the question whether a taxable person acting in bad faith can be refused the right of deduction only where there is a risk of loss of tax revenue for the Member State and a tax advantage for the taxable person or other parties involved in the transaction concerned, it must be observed that, under the reverse charge procedure, no payment is due, in principle, to the Treasury (see, in particular, judgments of 6 February 2014, Fatorie, C‑424/12, EU:C:2014:50, paragraph 29, and of 26 April 2017, Farkas, C‑564/15, EU:C:2017:302, paragraph 41). Moreover, the question whether the VAT payable on the prior or subsequent sales of the goods concerned has or has not been paid to the Treasury is irrelevant to the right of the taxable person to deduct VAT (see, to that effect, order of 3 September 2020, Vikingo Fővállalkozó, C‑610/19, EU:C:2020:673, paragraph 42 and the case-law cited). However, as is apparent from paragraphs 44 and 46 to 52 of the present judgment, the taxable person must be refused the right of deduction where the information necessary to verify that the supplier of the goods or services concerned had the status of taxable person is lacking or it is established to the requisite legal standard that that taxable person has committed VAT fraud or knew or ought to have known that the transaction relied on as a basis for that right was connected with such a fraud. A finding of a risk of loss of tax revenue is not, therefore, necessary in order to justify such a refusal." (Ferimet C-281/20)
- No requirement for the transaction to confer a tax advantage on anyone
"[57] Likewise, it is immaterial for that purpose whether or not the transaction in question conferred a tax advantage on the taxable person or on others involved in the supply chain. First, the existence of such an advantage has no bearing on whether the material conditions to which the right of deduction is subject, such as the status of the supplier of the goods or services concerned as a taxable person, are satisfied. Secondly, unlike rulings issued in relation to abusive practices, a finding that the taxable person participated in VAT fraud is not subject to the condition that that transaction has conferred on that person a tax advantage the grant of which is contrary to the objective pursued by Directive 2006/112 (order of 14 April 2021, Finanzamt Wilmersdorf, C‑108/20, EU:C:2021:266, paragraph 35)." (Ferimet C-281/20)
- Issuing false invoices/manipulation of evidence liable to prevent correct collection of tax may be treated as evasion
"[48] The presentation of false invoices or false declarations and any other manipulation of evidence is liable to prevent the correct collection of the tax and, therefore, to compromise the proper functioning of the common system of VAT. Such actions are all the more serious when committed in the context of the transitional arrangements for the taxation of intra-Community transactions, which, as noted in paragraph 42 of the present judgment, operate on the basis of the evidence provided by taxable persons.
[49] Therefore, EU law does not prevent Member States from treating the issuing of irregular invoices as amounting to tax evasion and from refusing to grant the exemption in such cases (see, to that effect, Schmeink & Cofreth and Strobel, paragraph 62, and order in Case C‑395/02 Transport Service [2004] ECR I‑1991, paragraph 30)." (R C-285/09)
- Deliberately failing to fulfil formal requirements is fraud of itself
"[40] In any event, the Court has held that, even if infringements of those formal obligations do not prevent the production of conclusive evidence that the substantive requirements giving rise to the right to deduct input VAT have been satisfied, such circumstances may establish the simplest case of tax evasion, in which the taxable person deliberately fails to fulfil the formal obligations incumbent upon him with the aim of evading payment of the tax (judgment of 28 July 2016, Astone, C‑332/15, EU:C:2016:614, paragraph 55).
[41] In particular, failure to file a VAT return that would allow VAT to be applied and monitored by the tax authorities is liable to prevent the correct collection of the tax and, therefore, to compromise the proper functioning of the common system of VAT. Therefore, EU law does not prevent such infringements from being considered to amount to tax fraud and the right to deduct being refused in such a case (judgment of 28 July 2016, Astone, C‑332/15, EU:C:2016:614, paragraph 56)." (Dobre C-159/17)
"[56] In particular, the failure to file a VAT return, like to failure to keep accounting records, which would allow VAT to be applied and monitored by the tax authorities, and the failure to record the invoices issued and paid are liable to prevent the correct collection of the tax and, therefore, to compromise the proper functioning of the common system of VAT. Therefore, EU law does not prevent Member States from treating such infringements as amounting to tax evasion and from refusing to grant the right to deduct in such cases (see, by analogy, judgment of 7 December 2010 in R., C‑285/09, EU:C:2010:742, paragraphs 48 and 49)." (Astone C-332/15)
- Must be based on a comprehensive assessment of all relevant facts
"[45] It follows that a taxable person may be denied the benefit of the right to deduct VAT only if, after a comprehensive assessment of all the relevant facts and circumstances, carried out in accordance with the rules of evidence laid down by national law, it is established that the taxable person has committed VAT fraud or knew or should have known that the transaction invoked to establish the right to deduct VAT was involved in such fraud. The benefit of this right may be denied only where these facts have been established beyond a reasonable doubt, and not by mere supposition (Order of 9 January 2023, ATS 2003, C-289/22, EU:C:2023:26, paragraph 55 and the case law cited)." (Granulines Invest C-270/24)
- Fictitious nature of contract does not prove fraud where goods actually delivered
"[47] It is for the referring court to determine whether, under the applicable national civil law rules, the supply contract between the taxable person and the issuer of the invoice should be considered fictitious, having regard to the actual role played by the latter in carrying out the transaction. However, the fictitious nature of such a contract, even if established, does not in itself constitute proof of VAT fraud or abuse of law [see, to that effect, judgment of 25 May 2023, Dyrektor Izby Administracji Skarbowej w Warszawie (VAT – Fictitious Acquisition), C-114/22, EU:C:2023:430, paragraph 49]." (Granulines Invest C-270/24)
- Issuing invoice with fictitious supplier may indicate knowledge
"[53] In the present case, in the context of that overall assessment, the fact that the taxable person who claims to be entitled to the right of deduction and who issued the invoice, knowingly mentioned a fictitious supplier on that invoice is relevant information which may indicate that that taxable person was aware that it was participating in a supply of goods connected with VAT fraud. It is, however, for the referring court to assess, taking into account all the evidence and factual circumstances of the case, whether that is indeed so in the context of the case in the main proceedings." (Ferimet C-281/20)
- Fictitious date of delivery on invoice for goods actually delivered does not prove VAT fraud
"[56] However, the fact that an invoice relating to a delivery of goods, which is established to have actually taken place, mentions a false date of execution – even if this mention is intentional – does not in itself constitute proof of the existence of VAT fraud." (Granulines Invest C-270/24)
- Inflated price does not prove fraud
"[53] In this regard, it should be noted that the excessive price of a supply of goods, even if established, which is for the referring court to verify, cannot in itself justify the refusal of the right to deduct VAT to the detriment of the taxable person (see, to that effect, judgment of 25 November 2021, Amper Metal, C-334/20, EU:C:2021:961, paragraph 36)." (Granulines Invest C-270/24)
- Mere fact that members of supply chain knew each other not sufficient by itself
"[44] In all cases, the mere fact that the members of the supply chain knew one other, although it is to be taken into account in the overall assessment of all the evidence and all the factual circumstances of the case, is not sufficient to establish the taxable person’s participation in the fraud." (Aquila Part Prod C-512/21)
Non-VAT fraud
- Direct tax fraud not sufficient
"[59] Lastly, in so far as the referring court also refers to the fact that concealing the true supplier’s identity may jeopardise direct taxation by depriving the tax authorities of means of control, it must be noted that it follows from the case-law referred to in paragraphs 30 and 31 of the present judgment that the right of deduction cannot be refused on that ground. Such a refusal would be contrary to the fundamental principle constituted by that right and, accordingly, to the principle of fiscal neutrality." (Ferimet C-281/20)
- Fictitious details on invoice for non-VAT fraud not relevant
"[57] Indeed, as the European Commission observed in its written observations, it could turn out that, in this case, the false delivery date shown on the invoice was entered not for the purpose of committing VAT fraud, but to meet the conditions of the credit scheme which ended on 9 January 2017, a matter which it is for the referring court to verify. However, such a practice, without prejudice to any consequences it may have on Granulines Invest's ability to benefit from this credit scheme, does not amount to VAT fraud." (Granulines Invest C-270/24)
- Fraudulent use of credit card to acquire goods irrelevant
"[25] Furthermore, it does not appear that tax fraud was committed in connection with the transactions at issue in the main proceedings, since, as is clear from the order for reference, the VAT relating to those transactions was duly declared and paid by Dixons.
[26] The fraudulent use of a bank card as a means of payment when those transactions were carried out does not affect the ability to classify them as supplies of goods within the meaning of the Sixth Directive and Directive 2006/112. Such use is a matter not of the objective criteria on which that concept is based but of the intention of the person who has taken part, as the person acquiring the goods, in the transactions at issue and of the processes carried out in order to give effect to that intention." (Dixon Retail Plc C-494/12)
FRAUD BY TAXPAYER
- Distinction between Fini and Kittel
"[123] There is a significant overlap between the test to be applied in Fini and that for Kittel. The distinction between the two is that in Fini the fraudulent or abusive conduct which HMRC must establish is that of the Appellants and not merely that there has been a fraudulent loss of tax of which the Appellants were or should have been aware." (Rich Couture Limited v. HMRC [2024] UKFTT 1077 (TC), Judge Brown KC)
- Where company is the very means by which fraud is being carried out, that company does not need to be aware in order to deregister
"[59] It is, in our view, difficult to conceive of a more proximate involvement of a company in VAT fraud than its being the very means by which the fraud is being carried out. It would be inconsistent with the Ablessio principle to impose a requirement about the knowledge of the directors of the company in relation to VAT fraud in circumstances where it was the company's own VAT number that was the means by which the fraud was being carried out and where it was a critical design feature of the scheme that, as the FTT found, the directors of the company concerned were "in name" only. There is no need to establish that the directors knew or should have known that they were facilitating a fraud or that any other person was dishonest or fraudulent. A requirement to that effect in the circumstances of this case would seriously undermine the effectiveness of the Ablessio principle in meeting the objective of making it more difficult for fraudulent transactions to be carried out. It would, in our view, represent a simple opportunity to those seeking to secure the opposite outcome." (Elphysic Limited v. HMRC [2025] UKUT 236 (TCC), Rajah J and Judge Andrew Scott)
PARTICIPATION IN FRAUD
Person who knew/should have known that transaction connected to VAT fraud is participant
"[40] The Court ruled that a taxable person is to be refused the right to deduct VAT not only where fraud is committed by the taxable person him or herself, but also where it is established that that taxable person, to whom the goods which served as the basis on which to substantiate the right to deduct were supplied, knew or ought to have known that, through the purchase of those goods, he, she or it was taking part in, or at least facilitated, a transaction connected with VAT evasion. Such a taxable person must, for the purposes of the VAT Directive, be regarded as participating in or facilitating evasion, whether or not he, she or it profits from the resale of the goods in the context of taxable transactions subsequently carried out by him, her or it, since that taxable person, in such a situation, aids the perpetrators of that evasion and becomes their accomplice (see, to that effect, judgment of 24 November 2022, Finanzamt M (Scope of the right to deduct VAT), C‑596/21, EU:C:2022:921, paragraphs 25 and 35 and the case-law cited)." (Konreo C-276/24)
"[43] If this is the case where fraud is committed by the taxable person himself, it is also the case where a taxable person knew or should have known that, by his acquisition, he was participating in a transaction involved in VAT fraud (Order of 3 September 2020, Vikingo Fővállalkozó, C-610/19, EU:C:2020:673, paragraph 51 and case law cited)." (Granulines Invest C-270/24)
- Irrelevant whether T profited from resale of goods or use of services
"[47] It has been considered, in that regard, that a taxable person who knew or ought to have known that, through his or her acquisition, he or she was participating in a transaction connected with the evasion of VAT must, for the purposes of Directive 2006/112, be regarded as a participant in that fraud, whether or not he or she profits from the resale of the goods or the use of the services in the context of the taxable transactions subsequently carried out by that person, since, in such a situation, the taxable person aids the perpetrators of that fraud and becomes their accomplice (order of 14 April 2021, Finanzamt Wilmersdorf, C‑108/20, EU:C:2021:266, paragraph 23 and the case-law cited)." (Ferimet C-281/20)
- Intended to require T to carry out reasonable steps to satisfy themself no fraud
"[41] The obligation on the national authorities and courts to refuse the right to deduct where a taxable person knew or ought to have known that the transaction was connected with evasion is intended in particular to require taxable persons to carry out the steps which could reasonably be asked of them in any economic transaction in order to satisfy themselves that the transactions which they carry out do not result in their participation in tax evasion (judgment of 24 November 2022, Finanzamt M (Scope of the right to deduct VAT), C‑596/21, EU:C:2022:921, paragraph 39 and the case-law cited)." (Konreo C-276/24)
- Knowledge of agent attributed to taxpayer
"[67] Regardless of the national rules governing agency and of the terms of the agency contract by which the taxable person has entrusted to a third party the performance of taxable transactions, the taxable person cannot, vis-à-vis the Treasury, escape that liability by relying on the existence of an agency contract, on the national rules governing it or on the terms of that contract, and by claiming that he or she was unaware of the facts constituting VAT fraud known to his or her agent. To allow the taxable person to act in that way would facilitate fraud and thus run counter to the objective of preventing tax evasion." (Aquila Part Prod C-512/21)
- Unlawful intention of supplier cannot be inferred merely from financial difficulties
"[38] However, for the reasons set out by the Advocate General in points 46 and 47 of her Opinion, the situation of a taxable person who purchases immovable property at the end of a statutory compulsory sale procedure, under the supervision of the public authorities, is not comparable to the situation of the other party to the contract with the principal VAT debtor that was at issue in the case which gave rise to that judgment. An unlawful intention on the part of a debtor whose asset is sold by way of enforcement not to pay VAT cannot be inferred merely from the financial difficulties that he or she faces. Accordingly, the view cannot be taken on that basis alone that, in carrying out a commercial transaction with that debtor, the purchaser of the asset commits an abuse of rights." (UAB Ha.En C-227/21)
Four possible tests
"[49] We have adopted a similar approach to that adopted by the tribunal in the cases of HMRC v SK Metals Ltd [2025] UKFTT 1211 ("SK Metals"), and HMRC v Deos [2025] UKFTT 1018 ("Deos").
(1) We will consider the appellants state of knowledge by first considering whether the appellants had direct actual knowledge that the purchases were connected with the fraudulent evasion of VAT.
(2) We then consider whether the appellants had blind eye knowledge of that connection.
(3) We then consider whether the evidence shows that the appellants had means of knowledge that the purchases were connected with fraud.
(4) Finally, we consider the objective trader test, namely whether it can be inferred from all of the circumstances that the objective trader would have known that the purchases were connected with the fraudulent evasion. This last test has been described in those two cases as one in which we need to consider where there was no reasonable explanation for the circumstances in which the purchases were undertaken other than the connection with VAT fraud." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
Means of knowledge
- Did T have the means of actually knowing of the connection to fraud?
"[43] Where a tax authority relies on a taxable person’s active participation in VAT fraud in order to refuse the right of deduction, it is incumbent on that authority, according to the case-law recalled in paragraph 30 of the present judgment, to adduce evidence of this. However, there is nothing to preclude that authority, in such a case, from basing that refusal, in addition or in the alternative, on evidence establishing that, in any event, the taxable person, had he or she exercised due diligence, ought to have known that, through his or her acquisition, he or she was participating in a transaction connected with fraud. Evidence of that fact, if it is adduced, is sufficient to establish the taxable person’s participation in the fraud and, therefore, to justify that refusal." (Aquila Part Prod C-512/21)
"[171] Whilst we accept that they made no genuine effort to check the integrity of their supply chain, we do not think that the law says that it is therefore axiomatic that they therefore knew or should have known that the only reasonable explanation for the circumstances of their purchases was that they were connected with fraudulent evasion.
[172] In [51] of Mobilx, knew or should have known is deemed to have the same meaning as "knowing or having any means of knowing". Knowing here seems to us to mean actually knowing. So the Bairds would need to have the means of actually knowing that the only reasonable explanation for the circumstances in which their purchases took place was that they were connected with fraud." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)