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HMRC internal manual

VAT Fraud

HM Revenue & Customs
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Basic interventions: output tax interventions: refusing zero rating of dispatches and exports where there is connection with fraud: the Mecsek principle: the ECJ judgment in the case of Mecsek: background & judgment


Mecsek-Gabona Kft (‘Mecsek’ - Case C-273/11) was a Hungarian company engaged in the wholesale supply of cereals, tobacco, seeds and fodder. It entered into a contract with Agro-Trade srl (‘Agro-Trade’), an Italian company, for the sale of rapeseed. Agro-Trade undertook to arrange the means of transportation and to transport the goods to Italy. Prior to transportation, Agro-Trade provided the registration numbers of the vehicles which would pick up the goods. After the vehicles had been weighed, the quantities of the goods purchased were entered on the CMRs, and the transport documents were presented by the carriers. The first copy of the completed CMRs was photocopied by Mecsek, while the originals remained with the carriers. The serial numbers of the 40 CMRs, which were consecutive, were returned to Mecsek by post from Agro-Trade’s address in Italy. Shortly after issuing sales invoices Mecsek checked Agro-Trade’s VAT number and found it to be valid.

In the course of checking Mecsek’s tax return, the Hungarian tax authority submitted a request for information to the Italian tax authority. According to the information returned, Agro-Trade could not be found. No company of that name had ever been registered at the purported business address (a residential property) and Agro-Trade had never paid VAT. Agro-Trade’s Italian VAT registration number was removed from the register with retroactive effect from 17th April 2009.

The Hungarian tax authority took the view that Mecsek had not succeeded in proving that the transaction in issue was a zero rated intra-Community supply of goods and assessed for the output tax. Mecsek appealed and the Hungarian court made a reference to the ECJ.

The judgment

At paragraphs 53 and 54 of the judgment the ECJ stated:

… it should be borne in mind that, in proceedings brought under Article 267 TFEU, the Court has no jurisdiction to check or to assess the factual circumstances of the case before the referring court. It is therefore for the national court to carry out an overall assessment of all the facts and circumstances of the case in order to establish whether Mecsek-Gabona had acted in good faith and taken every step which could reasonably be asked of it to satisfy itself that the transaction which it had carried out had not resulted in its participation in tax fraud.

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.

It concluded:

Article 138(1) of Council Directive 2006/112/EC … is to be interpreted as not precluding, in circumstances such as those of the case before the referring court, refusal to grant a vendor the right to the VAT exemption for an intra-Community supply, provided that it has been established, on the basis of objective evidence, that the vendor has failed to fulfil its obligations as regards evidence, or that it knew or should have known that the transaction which it carried out was part of a tax fraud committed by the purchaser, and that it had not taken every reasonable step within its power to prevent its own participation in that fraud.

VATF43232 looks at the judgment in more detail.