The onus is on the tax authority to prove that a taxpayer knew or should have known that another party was involved in tax evasion or fraud, according to two recent ECJ decisions.

In the Tóth case, it ruled that taxpayers’ right to deduct input VAT cannot be refused by the tax authority if the taxpayer did not know and ought not to have known that the supplier was involved in tax evasion or fraud.

In the Mecsek-Gabona case (decided on the same day), it ruled that a taxpayer could benefit from a tax exemption on a sale of goods within the EU, in the absence of objective evidence that the taxpayer knew or should have known that the purchaser had committed tax fraud.

Previously, Hungarian authorities have expected taxpayers to prove that they had acted in good faith but now the onus is on the authority to prove the contrary.

In the Tóth case:

  • the taxpayer had exercised its right to deduct input VAT on the basis of invoices that complied with all formal criteria
  • the supplies to which those invoices related had also actually been made
  • the tax authority had nonetheless denied the claimant’s right to deduct the VAT on the basis that the supplier’s private entrepreneur licence had been withdrawn, he had not declared the workers whom he employed and the claimant had failed to verify the legal relationship between the workers and the supplier

The ECJ ruled that 

  • the status of a taxable person cannot depend on any authorisation, registration or licence to carry on an economic activity, so the recipient is entitled to deduct VAT even if the supplier’s private entrepreneur licence has been withdrawn
  • in order to deny a VAT deduction, the onus is on the tax authority to prove on the basis of  objective evidence that the taxpayer knew or ought to have known that the transaction was connected to tax fraud committed by the issuer
  • the fact that a taxable person did not verify the legal relationship between the workers and the supplier or whether the latter had properly declared those workers did not constitute objective evidence that the claimant knew or ought to have known that he was participating in a transaction involving fraudulent evasion of VAT

Law: Tóth (C-324/11) and Mecsek-Gabona Kft (C-273/11)