THE BOTTOM LINE
- Zero-Rate VAT is a Privilege, Not a Right: The 0% VAT rate on intra-community sales can be retroactively revoked if you are deemed to have known, or should have known, that your transaction was connected to VAT fraud, even if the fraud was committed by your customer in another country.
- “Should Have Known” Sets a High Bar for Due Diligence: A court found that ignoring multiple red flags—such as customers lacking necessary permits, using illogical supply chains, or having a high turnover of trading partners—means a business fails to meet its due diligence obligations. Relying on a credit insurer’s check is not enough.
- Proactive Vetting is Crucial, Especially in High-Risk Sectors: This case, involving scrap metal, underscores that businesses in sectors known for fraud must implement and document robust Know Your Customer (KYC) procedures. Failure to do so can result in having to pay the full VAT amount on past sales, plus interest.
THE DETAILS
A Dutch scrap metal trader has lost its appeal against a €2.5 million VAT assessment, after The Hague Court of Appeal found it should have known it was supplying goods to UK companies involved in VAT fraud. The case serves as a stark warning for any company engaged in cross-border trade, highlighting that passive compliance is not enough. The Dutch company had applied the 0% VAT rate to its sales to several UK customers, as is standard for intra-community supplies. However, the tax authorities later argued this was improper, as the company was a link in a chain of fraudulent transactions, a finding the court has now confirmed.
The court found it plausible that the UK-based customers were systematically evading VAT. The fraudulent schemes varied: one customer was using fake purchase invoices to illegally offset its VAT liability on onward sales (a practice known as cross-invoicing). Another was identified by UK authorities (HMRC) as a missing trader—a company that collects VAT from its customers but then disappears without remitting the tax to the government. A third UK customer simply failed to file any VAT returns at all, despite conducting millions of euros in trade. The court concluded that VAT fraud was an integral part of the supply chains in which the Dutch company was operating.
The key to the ruling was the court’s determination that the Dutch company knew or should have known about the fraud. The court pointed to a series of compelling red flags that the company had ignored. Key employees had been explicitly warned about VAT fraud risks in the scrap metal sector in a previous venture. The company’s KYC checks were found to be woefully inadequate; basic research would have revealed that customers lacked the required environmental permits to trade scrap metal or were officially registered for entirely different activities, like “telecommunications”. Moreover, the company engaged in commercially illogical practices, such as routing sales through “buffer” companies and dealing with a rapid succession of UK partners whose VAT numbers were frequently deregistered—a classic sign of carousel fraud. The court ruled that the company failed to take the reasonable measures required of a prudent trader to avoid becoming entangled in fraud.
SOURCE
Source: Gerechtshof Den Haag (The Hague Court of Appeal)
