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HMRC internal manual

VAT Fraud

Basic interventions: other interventions: irrecoverable acquisition tax

Background - ‘X’ and Facet BV v Netherlands

The main issue in the two cases (case reference C-536/08 & C-539/08) was whether acquisition tax could be recovered where goods were acquired in a Member State other than the one in which the customer was VAT registered. Acquisition tax is normally due in the country to which the goods are delivered. However, if the customer isn’t VAT registered in that country, and uses a VAT number from a different Member State (normally its home Member State) to obtain zero-rating, the customer becomes liable to account for acquisition tax in that Member State as well. To avoid double taxation, this latter liability can be adjusted if the trader can prove that acquisition tax was accounted for in the Member State in which the goods were delivered.

The cases before the ECJ concerned Dutch companies that were buying goods from various other Member States and consigning them directly to Spain, using their Dutch VAT registration number to obtain zero-rating. The companies had no presence in Spain themselves, so had accounted for acquisition tax under their Dutch VAT registration, and had simultaneously recovered this as input tax. (The conditions for ‘triangulation’ were not satisfied, so they could not make use of that simplified procedure.)

The ECJ considered this scenario and decided that the acquisition tax was irrecoverable. This is because to allow recovery would defeat the regime’s policy objective, i.e. that the place of taxation should be the Member State to which the goods are delivered. If traders could simply account for, and recover, acquisition tax in their own Member State of registration then they would ‘no longer have any incentive to establish that the intra-Community acquisition in question had been taxed in the Member State of arrival of the dispatch or transport.’

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The following are two examples of cases in which this judgement may be relevant.

Where goods are dispatched from the UK

Where a UK taxable person dispatches goods to, for example, France, but zero-rates the supply on the basis of a VAT number from its customer in another Member State (for example, Spain). In this situation, the Spanish customer would be liable to account for irrecoverable acquisition tax in Spain, unless it could demonstrate to the Spanish authorities that acquisition tax had been accounted for in France - either by registering in France itself or by complying with the conditions to use the triangulation procedure.

Consideration should be given to notifying the relevant tax authorities of the transaction through mutual assistance procedures (Regulation 2003/1798).

In addition, where such transactions feature in appeals where input tax has been denied using the Kittel principle (VATF50000), it may also be worth referring in witness statements to the VAT implications for the customer, which may cast doubt on the commercial credibility of such arrangements.

Where goods are acquired in the UK

A UK taxable person acquires goods from a supplier in Italy for delivery to Greece and uses his UK VAT number to obtain zero-rating. If all three parties are properly VAT registered and comply with the relevant conditions then they can, of course, use the triangulation procedure. If not, the UK taxable person must either register to account for acquisition tax in Greece or would become liable for irrecoverable acquisition tax in the UK.

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Requesting further assistance

If you have any queries on the application of this principle in cases involving suspected VAT fraud please contact the VAT Fraud Team.