Value Added Tax : the Right to Deduct in Case of Carousel Fraud

Abstract: Taxable persons’ right to deduct input VAT is an integral part of the VAT system and may in principle not be limited. Carousel schemes deprive the Member States a great deal of tax revenue, investigations show that up to EUR 100 billion disap-pear every year. In order to stop these trading arrangements and reduce the big amount of tax revenue which disappears every year, some Member States would like to deny traders involved in carousel frauds the right to deduct the input VAT. It exist different opinions regarding taxable persons’ ability to deduct input VAT when involved in carousel frauds. The ECJ has given judgements in three interest-ing cases dealing with the right to deduct in case of carousel fraud. In the Optigen case, it was established that taxable persons who do not know or have any reason to believe that they are involved in a carousel fraud cannot be denied the right to deduct the input VAT. In the FTI case, it was concluded that taxable persons in-volved in carousel frauds can be jointly and severally liable to pay the VAT to-gether with the person, actually liable to pay the VAT. A precondition for making a taxable person jointly and severally liable is that the taxable person has to be aware or should have been aware that the transaction made, was involved in such a scheme. If the taxable person did not know or had no reason to suspect this, he cannot be made jointly and severally liable. The ruling in the Kittel case confirms the Optigen judgement as well as concludes that when a taxable person is aware or should have been aware that he is involved in a carousel scheme, he is not enti-tled to deduct the input VAT. If this is the case, it is possible for the tax authori-ties in the different Member States to deny taxable persons this right as well as claim a refund. These judgements clarify when the national tax authorities can deny a taxable per-son the right to deduct input VAT when the transactions are made in a chain of fraud. However, another problem occurred, it is up to the national courts to de-cide when a taxable person should be aware that he is involved in a carousel fraud. This decision shall be based upon objective factors, no guidelines or any other help as to what these objective factors should consist of have been published. This creates an interpretation gap for the national courts followed by the risk of having an outcome with different interpretations from the courts in the Member States.