This briefing document summarizes the key themes and ideas from the provided sources related to the Teleos case, focusing on the implications for VAT on intra-Community supplies within the EU.
1. Core Issue and Context
The Teleos case revolves around the interpretation of the Sixth VAT Directive concerning the conditions under which intra-Community supplies are exempt from VAT. The dispute arose because Teleos and Others, UK-based suppliers of mobile phones, claimed VAT exemption on sales to a Spanish company (TT), based on CMR consignment notes indicating the goods were transported to other Member States. However, the UK Commissioners of Customs & Excise later discovered that the information on these notes was false, leading them to conclude the goods never left the UK and thus reassessed VAT on the supplies.
This case highlights the challenges in ensuring VAT compliance in intra-Community trade after the abolition of internal frontier checks.
2. Key Legal Questions and CJEU Ruling
The High Court of Justice of England and Wales referred several questions to the Court of Justice of the European Union (CJEU) for a preliminary ruling. These questions primarily concerned:
- Definition of “Dispatched”: When does an intra-Community acquisition take place and the exemption of the intra-Community supply apply, specifically focusing on the meaning of the term “dispatched” in Article 28a(3) and Article 28c(A)(a) of the Sixth VAT Directive?
- Supplier Liability: Under what circumstances can a tax authority retroactively require a supplier to pay VAT on an intra-Community supply if the evidence initially provided for VAT exemption later proves false due to the purchaser’s fraud?
The CJEU ruled:
- Physical Movement is Essential: ” …the intra-Community acquisition of goods is effected and the exemption of the intra-Community supply of goods becomes applicable only when the right to dispose of the goods as owner has been transferred to the purchaser and the supplier establishes that those goods have been dispatched or transported to another Member State and that, as a result of that dispatch or that transport, they have physically left the territory of the Member State of supply.” This confirms that the physical movement of goods across borders is a fundamental requirement for VAT exemption on intra-Community supplies.
- Good Faith and Reasonable Measures: The competent authorities cannot retroactively require a supplier to pay VAT if the supplier ” acted in good faith and submitted evidence establishing, at first sight, his right to the exemption of an intra-Community supply of goods, subsequently to account for value added tax on those goods where that evidence is found to be false, without, however, the supplier’s involvement in the tax evasion being established, provided that the supplier took every reasonable measure in his power to ensure that the intra-Community supply he was effecting did not lead to his participation in such evasion.” This introduces the concept of “reasonable measures” and places a responsibility on suppliers to perform due diligence.
- Purchaser’s Declaration is Additional Evidence, not Conclusive Proof: ” The fact that the purchaser made a declaration concerning intra-Community acquisition, such as that in question in the main proceedings, to the tax authorities of the Member State of destination may constitute additional evidence tending to establish that the goods have actually left the territory of the Member State of supply, but it does not constitute conclusive proof for the purposes of the exemption from value added tax of an intra-Community supply.“
3. Implications for Businesses
The Teleos case has significant implications for businesses engaged in intra-Community trade:
- Emphasis on Physical Movement: Businesses must ensure and be able to demonstrate that goods have physically left the Member State of supply to qualify for VAT exemption.
- Due Diligence Obligations: Suppliers are now explicitly required to take “every reasonable measure” to prevent tax evasion. While the ruling doesn’t define this term precisely, it likely includes verifying the purchaser’s VAT registration number, confirming the purchaser’s business activities, and scrutinizing transport arrangements.
- Balancing Legal Certainty and Fraud Prevention: The CJEU aimed to balance the need to combat VAT fraud with the principles of legal certainty and proportionality. Suppliers are not automatically liable for VAT if they acted in good faith and took reasonable precautions. This aims to maintain fairness and stability within the EU VAT system.
4. Key Principles
Several key principles of EU law are central to the Teleos case:
- Fiscal Neutrality: The VAT system should not distort competition by treating similar transactions differently. The ruling ensures that suppliers involved in intra-Community trade are not placed at a disadvantage compared to those conducting purely domestic transactions. ” …that principle precludes, in particular, treating similar supplies of services, which are thus in competition with each other, differently for VAT purposes…“.
- Legal Certainty: Businesses should be aware of their tax obligations before entering into a transaction. The CJEU ruling underscores the importance of clear and predictable rules. “It would be contrary to the principle of legal certainty if a Member State which has laid down the conditions for the application of the exemption of intra-Community supplies by prescribing, among other things, a list of the documents to be presented to the competent authorities, and which has accepted, initially, the documents presented by the supplier as evidence establishing entitlement to the exemption, could subsequently require that supplier to account for the VAT on that supply, where it transpires that, because of the purchaser’s fraud, of which the supplier had and could have had no knowledge, the goods concerned did not actually leave the territory of the Member State of supply.“
- Proportionality: Measures taken by Member States to combat tax evasion should be no more intrusive than necessary to achieve their objectives. Imposing the entire burden of proof and liability on suppliers, regardless of their involvement in fraud, could be considered disproportionate.
5. Impact of “Ex-Works” (EXW) Incoterms
The use of “ex-works” (EXW) Incoterms in the Teleos case placed the responsibility for transporting the goods to another Member State on the purchaser. This raised the question of whether the suppliers (Teleos and Others) had sufficiently proven that the goods had actually left the UK to qualify for VAT exemption on intra-Community supplies. This highlights that when using EXW, the supplier must be especially diligent in obtaining and retaining evidence of export.
6. Significance of CMR Consignment Notes
Teleos initially presented CMR consignment notes as evidence of export. While these documents are commonly used, the case demonstrates that they are not sufficient proof on their own if their validity is subsequently challenged. Businesses should consider obtaining additional evidence to support their claims for VAT exemption, especially if there are any doubts about the reliability of the purchaser or transport arrangements.
See also
- Join the Linkedin Group on ECJ/CJEU/General Court VAT Cases, click HERE
- VATupdate.com – Your FREE source of information on ECJ VAT Cases
- Podcasts & briefing documents: VAT concepts explained through ECJ/CJEU cases on Spotify
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