What Is VAT Fraud?

Article by: Pawel Mikula, First published on KluwerTaxBlog

One function of the law is to regulate human behaviour. An instrument to reach this goal is to impose sanctions for undesirable behaviour on persons who are responsible for inadmissible acts. It goes without saying that it should be commonly and clearly known at least:

  1. which occurrences are undesirable by the lawgiver;
  2. who is responsible for these actions;
  3. what are the requisites for such responsibility to apply;
  4. what are the sanctions imposed for such undesirable behaviour.

To put this into a more practical perspective, when a thief steals my car:

  1. the theft is a behaviour which is deemed as undesirable by the legal system;
  2. the person responsible for this act is the thief (and, eventually, his accomplices);
  3. the requisites for bearing the responsibility relate, inter alia, to the thief’s fault (in any way such a fault might be defined, depending on the legal system in question);
  4. the sanction might consist in, e.g., a fine or imprisonment.

Taking this canvass to the field of VAT fraud, as understood on the basis of the case-law of the Court of Justice of the European Union (CJEU), it follows that:

  1. the behaviour deemed as undesirable is a ‘VAT fraud’ (I will elaborate on this term below);
  2. and 3. the entities responsible for this are those who commit the fraud or those who transact with the fraudster while knowing or should have known about the transaction being fraudulent;
  3. the sanctions for committing fraud may be a denial of the right to deduct the input VAT or the right to an exemption.

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