Amsterdam Court of Appeal recently ruled that a cleaning company is not entitled to a VAT deduction because it knew (or at least ought to have known) that it was participating in VAT fraud within the supply chain.
The case study
The cleaning company hires staff through a temporary employment agency and engages subcontractors. The cleaning company receives invoices including VAT from these service providers. The cleaning company deducts this VAT. The tax authorities have determined that the VAT should have been transferred to the cleaning company.
According to the Tax and Customs Administration, this incorrectly invoiced VAT is not deductible. The VAT will therefore be recovered, plus a penalty of 25%. This additional assessment is necessary because the Tax and Customs Administration had initially refunded the VAT, following the cleaning company’s responses to its enquiries.
The Tax and Customs Administration’s concern, of course, is that the VAT has not been paid by the temporary employment agency and the subcontractors.
VAT deduction based on the principle of good faith
As the cleaning company had answered questions prior to the VAT refund, it invoked the principle of good faith. The Court of Justice ruled in the Italmoda judgment rules that such an appeal must be dismissed where it is established that tax fraud has been committed.
On the basis of this judgment, the Supreme Court The Amsterdam Court of Appeal has been instructed to examine whether, in the aforementioned case, it can be established on the basis of objective evidence that the cleaning company was involved in VAT fraud. For the VAT deduction to be refused, it is sufficient that the cleaning company should have known that it was part of VAT fraud. It is irrelevant for the refusal of the VAT deduction whether the cleaning company itself derived any benefit from the VAT fraud.
VAT fraud
The Amsterdam Court of Appeal first of all finds that VAT fraud has taken place in this case. The reverse-charge mechanism was deliberately not applied, a conclusion the Court draws from the following circumstances.
- Before contracts were concluded with the cleaning company, the reverse charge mechanism had been applied in similar situations.
- After that, VAT was systematically included on invoices.
- However, VAT was systematically not paid.
And the cleaning company knew this, or at any rate should have known it, given that its director must be aware of the reverse charge mechanism applicable to the cleaning sector. The Court bases this ruling on the following circumstances.
- The knowledge that the director is expected to have as a result of work placements or work carried out at accountancy firms.
- The application of the reverse charge mechanism in relation to the cleaning company’s clients.
Neutrality
Of course, a VAT deduction can only be refused once the Tax and Customs Administration has met the high standard of proof required of it. On the one hand, it must be established that VAT fraud has taken place. And on the other hand, it must be determined on the basis of objective evidence that the trader claiming the VAT deduction must have been aware of this.
Nevertheless, business owners would be well advised to continue to assess very critically whether VAT is being charged to them correctly. If in doubt, consult a (VAT) adviser.