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HMRC internal manual

VAT Fraud

Basic interventions: output tax interventions: refusing zero rating of dispatches and exports where there is connection with fraud: the ECJ judgment in the case of 'R'


In the case of ‘R’ (case C-285/09), goods (cars) were supplied and transported from Germany to Portugal. Although the movement of goods was genuine, the supplier (Mr R) generated false sales invoices made out to fictitious purchasers (fictitious in the sense that they weren’t the actual purchasers of the cars, although they were ‘real undertakings registered in Portugal’). This enabled the real purchasers of the cars to evade VAT on the acquisition and onward sale of the cars to private individuals in Portugal.

Mr R was convicted of tax evasion in Germany, but appealed on the grounds that there was no VAT loss in Germany, since the goods were in fact dispatched to taxable persons in Portugal (albeit not the ones named on the invoices) and hence the supplies were properly zero-rated.

The ECJ endorsed the decision of the German authorities to refuse to allow zero-rating in these circumstances. As in Kittel & other judgements, the Court reiterated that the prevention of tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive. It also helpfully commented that the principles of fiscal neutrality, legal certainty and legitimate expectations ‘cannot legitimately be invoked by a taxable person who has intentionally participated in tax evasion and who has jeopardised the operation of the common system of VAT.’

Practical implication

The ECJ chose to limit its judgement to the particular facts of the case, i.e. where the true identity of purchasers in intra-Community supplies had been concealed to facilitate evasion in the Member State of acquisition. Therefore, unlike the Mecsek principle (VATF43230), the judgement does not provide specific authority for the denial of zero-rating in other circumstances. However, in general terms the onus remains with the supplier to prove their entitlement to zero-rating and they become liable to account for VAT on dispatches if they fail to meet the required conditions, which would include knowingly relying on false evidence such as in the case of ‘R’.

If you come across cases involving the zero-rating of intra-Community supplies of goods and a knowing connection with fraud on the part of the supplier, you should consider the normal VAT rules for zero-rating of dispatches and for recovery of input tax (including the Kittel principle (VATF50000)). If you are unable to identify an appropriate method of intervention, or require further advice, please contact the VAT Fraud Team.