Penalty on additional VAT assessment cancelled due to reasonably arguable position

The Dutch company, X BV, operates a wholesale business in computers, peripherals and software. X BV purchases goods in the Netherlands from Dutch suppliers, some of which are resold to businesses in other Member States. A number of X BV’s customers appeared to be “missing traders” who did not account for VAT on their purchases. In light of existing CJEU case law, the Dutch tax authorities argued that X BV was not entitled to deduct this input VAT as it was connected to fraud. The Dutch tax authorities therefore imposed an additional VAT assessment and a fine on X BV. The Dutch High Court held in favour of the Dutch Tax authorities.

X BV appealed this decision, arguing that the High Court failed to address its arguments. According to X BV, whether local tax authorities could deny the recovery of VAT incurred on the purchase of goods preceding intra-community supplies was too uncertain.

The Supreme Court agreed with X BV, considering that, at the time X BV recovered the input VAT, there were reasonable doubts as to whether their position was correct.

The VAT position (and more specifically the VAT refund position) was only clarified subsequently by CJEU case law. The position was therefore unclear until December 2014 which meant that X BV could reasonably argue legal uncertainty.

Key takeaway

The recovery of VAT connected to fraudulent activity is a complex topic and somewhat subjective. It is therefore crucial that the level of diligence that is expected from taxpayers seeking to recover VAT be clear and certain.