© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
B3. Supply chain fraud
EFFECTS OF SUPPLY CHAIN FRAUD​
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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 FÅ‘vállalkozó, C-610/19, EU:C:2020:673, paragraph 50 and the case law cited)." (Granulines Invest C-270/24)
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- 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)
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- 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)
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Denial of right to exemption/zero-rating
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FRAUD​
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- 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)
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- 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)
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- 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)
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- 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)
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- 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)
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Non-VAT fraud​
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- 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)
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- 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)
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PARTICIPATION IN FRAUD​
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Person who knew/should have known that transaction connected to VAT fraud is participant
"[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 FÅ‘vállalkozó, C-610/19, EU:C:2020:673, paragraph 51 and case law cited)." (Granulines Invest C-270/24)
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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)
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Means of knowledge
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- Did T have the means of actually knowing of the connection to fraud?
"[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)
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