Fraud in Customer Chain (Mecsek-Gabona Kft)

Mecsek-Gabona Kft (‘Mecsek’) was a Hungarian company that legitimately wholesaled various products, including seed. It sold rapeseed to an Italian company (Agro-Trade srl), who arranged the transportation from Hungary to Italy. Apparently valid CMR’s were sent to Mecsek to evidence the export.

The Hungarian Tax Authorities decided to investigate Mecsek’s VAT return and made enquiries in Hungary. It was discovered that Agro-Trade srl had gone missing and had never traded from the registered address.

The Hungarian Tax authorities took the view that Mecsek had not proved that the transactions in issue should be zero rated and raised VAT assessments. Mecsek appealed and the Hungarian Tribunal asked the European Court of Justice (“ECJ”) to decide the issue.

The ECJ is there to advise the various EU Tribunals what they should and should not take into account. The ECJ Judgement stated that Mecsek-Gabona had to prove that they had acted in good faith and taken every reasonable step to satisfy itself that the transactions were not connected to fraud. In other words, and just like the Kittel principle, if Mecsek-Gabona knew or should have known that its Italian customer was fraudulent, and that they had not taken every step which could reasonably be asked of it to prevent that fraud from being committed, there would be no entitlement to zero rate the export.

This simply means that HMRC can reverse the zero rating for VAT purposes of any export (including services) if a company (through its directors or staff) knew or should have know that the sale was connected to VAT fraud. And just like Kittel, that doesn’t necessarily mean that the VAT fraud was committed by a direct customer, the VAT fraud could be committed by the customer’s customer.

2020-02-04T20:58:50+00:00 February 4th, 2020|Tax Court Judgements|