Basic interventions: output tax interventions: refusing zero rating of dispatches and exports where there is connection with fraud: the Mecsek principle: applying the Mecsek principle - the three limbs
As with the Kittel principle (VATF50000), the Mecsek principle can be broken down into three limbs:
- Has there been a tax fraud committed by the customer?
- Has the taxable person taken every reasonable step to prevent himself from being involved in that tax fraud?
- Did the taxable person know, or should he have known, that the transaction was part of the tax fraud?
The three limbs
Limb (1) - ‘Has there been a tax fraud committed by the customer?’
To begin with, although the ECJ used the term ‘tax fraud’ for the purposes of implementing Mecsek we would seek to establish whether there was a VAT fraud. However, if you have evidence of some other tax fraud being committed by the customer please feel free to discuss this with the VAT Fraud Team.
In order to evidence that the customer has committed a tax fraud you will need evidence from the customer’s tax authority that directly deals with this point. This is obtained by making a SCAC (Standard Committee on Administrative Co-operation) request. If you require assistance in drafting a SCAC in this circumstance please read the guidance in MTOG8400(This content has been withheld because of exemptions in the Freedom of Information Act 2000) Assistance can also be sought from the Central Coordination Team(This content has been withheld because of exemptions in the Freedom of Information Act 2000) . The type and quality of the evidence needed is discussed in VATF43234.
The most important thing to remember is that we need to evidence that a tax fraud ‘more probably occurred than not’ (VATF94000). This is why it is important to ensure that we ask the right questions.
If the tax fraud has been committed by someone further down the supply chain please see VATF43235.
Limbs (2) & (3) - ‘Has the taxable person taken every reasonable step to prevent it from being involved in that tax fraud?’ and ‘Did the taxable person know, or should he have known, that the transaction was part of the tax fraud?’
Although the literal wording of the Mecsek judgement indicates that these are separate conditions, for practical purposes the same evidence may go towards proving both propositions and therefore they should be considered in conjunction with each other. For example, it is virtually impossible to envisage a situation in which there is firm evidence that a taxable person knew or should have known that its transaction was part of a tax fraud and yet they nevertheless could be said to have taken every reasonable step to prevent their involvement in such fraud. It is almost inevitable that any precautions or checks undertaken in these circumstances would be mere ‘window dressing’, i.e. undertaken by the taxable person solely to give the impression that they took all reasonable steps. Therefore you should adopt the same approach as for the Kittel principle and focus on the question of whether the taxable person knew of should have known that its transaction was connected with fraud.
The following sections of this guidance manual will assist in determining whether limbs (2) and (3) have been evidenced:
- VATF53400 in relation to ‘knew or should have known’;
- VATF70000 in relation to due diligence and risk assessment, which will assist when determining whether someone took ‘every reasonable step’; and
- VATF60000 in relation to indicators that a transaction might be contrived.
In addition, VEXP70400 provides guidance on determining whether a supplier acted in ‘good faith’ and took reasonable precautions.