Transactions involving the purchase in the UK of computer processor chips (CPUs) which were subsequently exported to another member state, which were not themselves vitiated by VAT tax fraud, constituted supplies of goods or services effected by a taxable person acting as such and an economic activity within the meaning of art. 2(1), 4 and 5(1) of Directive 77/388 (‘the sixth directive’), where they fulfilled the objective criteria of those terms, regardless of the intention of a trader other than the taxpayer concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subsequent to the transaction carried out by that taxpayer, of which he or she had no knowledge. The right to deduct input tax by the taxpayer who carried out such transactions could not be affected by the fact that in the chain of supply another prior or subsequent transaction was vitiated by VAT fraud, without that taxpayer knowing.

Facts

The taxpayers in these joined cases dealt in computer components and especially CPUs. They each challenged the rejection by Customs of their claims for reimbursement of VAT paid on the purchase in the UK of CPUs which were subsequently exported to another member state. The issue arose whether, in a chain of supply which was part of a carousel fraud by others, a trader became entitled to credit for input tax in respect of goods sold to him when, in that chain, there was a missing trader or a trader using a ‘hijacked’ VAT registration number without, in either case, the trader who was claiming the credit being concerned with or having knowledge of such other trader's failure to discharge his liability or such other trader's misappropriation of a VAT number. The taxpayers appealed against decisions of the VAT and Duties Tribunal ([2003] BVC 2,319 and 2,518) that Customs had legitimately maintained that the transactions in question fell outside the scope of VAT. It found that a trader did not have a right to a refund of input VAT paid on goods which it then sold to companies outside the UK, when there was a defaulting trader or a trader using a hijacked VAT number in the chain of supply, even though the trader claiming the refund was in no way involved in or had no knowledge of the failure of the other trader to fulfil its obligations or the hijacking of the VAT number, and the chains of supply which included the purchases and sales of the trader were part of a carousel fraud operated by third parties without its knowledge. The taxpayers appealed to the High Court which made a reference to the European Court of Justice (ECJ) for a preliminary ruling.

Issue

Whether transactions which formed part of a carousel fraud were economic activities within the meaning of the sixth directive.

Decision

The ECJ (Third Chamber) (ruling accordingly) said that an analysis of the definitions of taxable person and economic activities showed that the scope of the term economic activities was very wide, and the term was objective in character, in the sense that the activity was considered per se and without regard to its purpose or results. The definitions of ‘supply of goods’ and ‘taxable person acting as such’ showed that those terms, which defined taxable transactions under the sixth directive, were all objective in nature and applied without regard to the purpose or results of the transactions concerned.

An obligation on the tax authorities to carry out inquiries to determine the intention of the taxable person would be contrary to the objectives of the common system of VAT of ensuring legal certainty and facilitating application of VAT by having regard, save in exceptional cases, to the objective character of the transaction in question. An obligation on the tax authorities to take account, in order to determine whether a given transaction constituted a supply by a taxable person acting as such and an economic activity, of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subsequent to the transaction carried out by that taxable person, of which that taxable person had no knowledge and no means of knowledge, would a fortiori be contrary to those objectives. Each transaction had therefore to be regarded on its own merits and the character of a particular transaction in the chain could not be altered by earlier or subsequent events.

It followed that transactions such as those at issue, which were not vitiated by VAT fraud, were supplies of goods or services effected by a taxable person acting as such and an economic activity within the meaning of the sixth directive, where they fulfilled the objective criteria on which the definitions of those terms were based, regardless of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subsequent to the transaction carried out by that taxable person, of which he had no knowledge and no means of knowledge. Nor could the right to deduct input VAT be affected by the fact that in the chain of supply of which those transactions formed part another prior or subsequent transaction was vitiated by VAT fraud, without that taxable person knowing or having any means of knowing. The right to deduct provided for in art. 17ff. of the sixth directive was an integral part of the VAT scheme and in principle might not be limited. It had to be exercised immediately in respect of all the taxes charged on transactions relating to inputs.

The question whether the VAT on the earlier or later sale of the goods concerned to the end-user had been paid to the public purse was irrelevant to the right of the taxable person to deduct input VAT. According to the fundamental principle which underlay the common system of VAT, and which followed from art. 2 of the first and sixth directives, VAT applied to each transaction by way of production or distribution after deduction of the VAT directly borne by the various cost components.

European Court of Justice (Third Chamber). Judgment delivered 12 January 2006.