CJEU on the right to deduct VAT if supplier pretends to be another person

In a German case, a buyer purchased a second-hand car from a seller (supplier A) who with another person’s knowledge pretended to be that person (supplier B). According to the issued invoices, there were two sales: supplier A first sold the car to supplier B for a lower amount, who then sold it to the buyer for a higher amount. The buyer claimed a deduction in the amount of the VAT they had paid. However, the state lost tax in the amount of the difference in VAT between the first and second sales, as suppliers A and B committed tax fraud (only supplier A paid output VAT). The buyer was not knowingly involved in the fraud.

The CJEU previously ruled that it is irrelevant whether a person who is involved in a tax evasion derives a tax or economic advantage from it; what matters is the element of knowledge.

The court also referred to the existing case law and highlighted the requirements of reasonable care by taxable persons: taxpayers should make sure that they are not involved in a tax evasion whenever they receive taxable supplies. The buyer should therefore have checked the identity of their contractual partner as he would thus have become aware of the existence of tax evasion.

The CJEU held that the right to deduct may be denied if the taxpayer could or ought to have known of the existence of tax evasion within the chain of transactions in which they participated. The right to deduct may be denied in full, notwithstanding the fact that the loss suffered by the state due to the tax evasion may be lower than the deduction at issue.

The judgment partly breaks through the principle of neutrality of the VAT system. The only consolation may be that according to the CJEU, the referring German court still has to investigate whether the buyer really could and ought to have known about the existence of VAT evasion. It will be interesting to see what position the Czech financial administration will take on the judgment.