Proof of the existence of a Carousel fraud

In this case a Romanian company registered for VAT in Hungary was acting as an intermediary for the wholesale of food, beverages and tobacco products. The taxpayer was denied input VAT recovery right on the basis that the tax authorities suspected that it was taking part in a missing trader fraud. The Court held first that the tax authorities could not assume that a fraud was involved, therefore deny the taxpayer’s right to recover VAT on costs simply due to the fact that the transaction in question was part of a circular invoice chain. The Court also held that:

• The fact that the taxpayers involved in the chain transactions knew each other was not sufficient to consider that one of them should have known that they were participating in the fraud;
• The level of due diligence that a taxpayer must carry out to make sure that they are not involved in a fraudulent chain of transactions cannot be as complex and extensive as what the tax authorities would normally carry out;
• The fact that the taxpayer did not comply with EU food safety requirements was not an element that could be determinative of the fact that that taxpayer was acting fraudulently from a VAT perspective; and
• Finally, the fact that the legal representative of the taxpayer’s agent had knowledge of the facts constituting this fraud was not conclusive of the fact that that taxpayer was fraudulent.

Key takeaway

This judgment of the CJEU should be welcomed as it gives several criteria and tests to determine where a taxpayer can be found to have actively participated in a fraud (or knew or should have known of that fraud). There appears to be a positive shift according to which the tax authorities must prove the existence of the fraud based on factual and objective elements with a diligence that goes beyond what should be expected of taxpayers.