Fraud in Customer Chain (Mecsek-Gabona Kft)

Fraud in Customer Chain (Mecsek-Gabona Kft)

The European Court of Justice case involving Mecsek-Gabona Kft, a Hungarian wholesaler, has important implications for businesses involved in cross-border trade.

Mecsek-Gabona sold rapeseed to an Italian buyer, Agro-Trade srl, and held valid shipping documents including CMRs to support the intra-community supply. On the face of it, the transaction appeared legitimate and entitled to zero-rating.

However, the Hungarian tax authorities subsequently discovered that Agro-Trade had disappeared and had never actually operated from its registered address. On this basis, the authorities denied the zero-rating that Mecsek-Gabona had applied to the supply.

The key principle established by the court was that Mecsek-Gabona had to prove both its good faith and that it had taken every reasonable step to ensure that its transaction was not connected to fraud. Holding valid transport documents alone was not sufficient.

This case significantly extends the Kittel principle. While Kittel established that input tax could be denied where a trader knew or should have known of fraud in the supply chain, the Mecsek-Gabona judgment confirms that companies cannot claim export zero-rating if they knew or should have known that the customer was involved in fraudulent activity.

The practical consequence is that HMRC can reverse zero-rating on exports where companies have failed to conduct adequate due diligence on their customers. Businesses engaged in cross-border trade must ensure they carry out thorough checks on their buyers and retain comprehensive records of their due diligence procedures.