Flashback on ECJ Cases C-439/04 (Axel Kittel) & C-440/04 (Recolta Recycling SPRL) – Right to deduct VAT may be refused if participating in VAT fraud.

On July 6, 2006, the ECJ issued its decision in the cases C-439/04 (Axel Kittel) & C-440/04 (Recolta Recycling SPRL)

Context: Sixth VAT Directive – Deduction of input tax – ‘Carousel’ fraud – Contract of sale incurably void under domestic law

Article in the EU VAT Directive

• Article 2 of First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes (OJ, English Special Edition 1967, p. 14), as amended by the Sixth Directive (‘the First Directive’), provides:
  • ‘The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged.
  • On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.
  • The common system of value added tax shall be applied up to and including the retail trade stage.’
• Article 2(1) of the Sixth Directive provides:
  • ‘The following shall be subject to value added tax:
  • 1.       the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;’
• As set out in Article 4(1) and (2) of that directive:
  • 1.       “Taxable person” shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.
  • 2.       The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity.’
• According to Article 5(1) of the same directive, ‘“[s]upply of goods” shall mean the transfer of the right to dispose of tangible property as owner’.
• Article 17(1) and (2)(a) of the Sixth Directive provides:
  • 1.       The right to deduct shall arise at the time when the deductible tax becomes chargeable.
  • 2.       In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:
  • (a)       value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person’.

Facts

C-439/04

• The referring court states that the limited company Ang Computime Belgium (‘Computime’) bought and resold computer components and that, following a report drawn up by the tax authorities, those authorities decided that Computime had knowingly participated in a VAT ‘carousel’ fraud intended to recover one or more times amounts of VAT invoiced by suppliers for the same goods and that the supplies effected to Computime were fictitious. For those reasons, the tax authorities refused to allow Computime the right to deduct the VAT paid on those supplies.
• The file shows that the Verviers VAT collector issued Computime with a demand for payment dated 13 October 1997. The sums claimed amounted to approximately BEF 240 million in respect of taxes and nearly BEF 480 million in respect of fines (approximately EUR 18 million in total).
• Computime applied to the Tribunal de première instance de Verviers (Verviers Court of First Instance) to have that demand for payment set aside. By a judgment of 28 July 1999, that court declared the application to be unfounded. That ruling was upheld by a judgment of the Cour d’appel de Liège (Liège Court of Appeal) of 29 May 2002.
• Mr Kittel, acting in his capacity as Computime’s receiver, subsequently brought an appeal against that judgment before the Cour de cassation (Court of Cassation).

 C-440/04

• The referring court states that Recolta bought from a certain Mr Ailliaud 16 luxury vehicles, which the latter had himself purchased from the company Auto‑Mail. The purchases by Mr Ailliaud did not give rise to any VAT payable to the Treasury and Mr Ailliaud did not pass on to the Belgian State the VAT paid by Recolta, which resold the vehicles free of VAT to Auto-Mail under an authorisation for export sale.
• The documents in the file show that, according to an investigation by the Special Inspectorate of Taxes, Mr Ailliaud and Auto-Mail had set up a scheme for ‘carousel’ tax fraud, of which the transactions with Recolta formed part.
• On 26 October 1989, the Verviers VAT collector issued Recolta with a demand for payment of a sum in excess of BEF 4.8 million in respect of taxes and just over BEF 9.7 million in respect of fines (approximately EUR 360 000 in total).
• Recolta brought opposition proceedings against that demand for payment before the Tribunal de première instance de Verviers. By a judgment of 1 October 1996, that court, after having found that there was nothing to suggest that Recolta and its directors knew or had any suspicion that they were involved in a major fraud scheme, declared that the demand for payment issued by the collector had no lawful basis and was therefore null and void. The case also gave rise to criminal proceedings, in the course of which the Tribunal correctionnel de Bruxelles (Brussels Criminal Court) made an order on 7 January 1994 discharging the manager of Recolta.
• The Belgian State brought an appeal against that judgment before the Cour d’appel de Liège, submitting that the agreements on which those invoices were based were incurably void under domestic law because Mr Ailliaud’s main purpose in entering into a contract with Recolta was to effect transactions which were contrary to the workings of VAT. As the transactions at issue had an unlawful basis, under Article 1131 of the Civil Code, the conditions required for entitlement to the right to deduct, inter alia that there should be a supply of goods, were not fulfilled.
• The Cour d’appel de Liège upheld the judgment, whereupon the Belgian State appealed to the Cour de cassation.

Questions

AG Opinion

(1)      It is contrary to First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes, and to Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, to deny a taxable person who buys goods without knowledge of the fraud perpetrated by the seller, the right to deduct VAT, on the ground that under domestic civil law that contract is incurably void.

(2)      The answer is the same where the taxable person is aware of the fraud, but neither participates in it nor derives a financial advantage from it.

(3)      If he knowingly participates in an operation of that kind, planned for the sole purpose of reducing the tax burden, thus committing an abuse of rights, the aforementioned common system requires that he lose the right to deduct.

Decision

Where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, Article 17 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995, must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void – by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller – causes that taxable person to lose the right to deduct the value added tax he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of value added tax or to other fraud.

By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of value added tax, it is for the national court to refuse that taxable person entitlement to the right to deduct.

Personal comments/VATupdate 

Source

• Curia

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