Kittel and Recolta Recycling: VAT Deduction and Knowledge of Chain Fraud
A taxable person who knew or should have known that their purchase was part of a transaction connected with VAT fraud may be refused the right to deduct. Conversely, a customer who did not and could not know of the fraud keeps the deduction — good faith backed by objectively reasonable measures is an EU-law standard.
Facts
The joined Belgian cases concerned traders involved — knowingly or unknowingly — in carousel-type VAT fraud chains. The Belgian administration refused deductions, relying on the absolute nullity of the contracts under national law as contrary to public policy. The referring court asked whether the nullity of the contract or the existence of fraud in the chain excludes the deduction even for a customer acting in good faith.
Legal assessment
The Court reiterated that the right to deduct is an integral part of the VAT system and in principle may not be limited. Fraud committed by another link in the chain cannot be mechanically attributed to every participant: what matters is the subjective criterion of knowledge assessed on objective circumstances. Where the customer took every measure that could reasonably be required to avoid participation in fraud, the deduction stands even if fraud occurred in the chain. But a customer who knew or should have known participates in the fraud for VAT purposes — regardless of whether they profited from it. The burden of proving the objective circumstances of knowledge lies with the tax administration.
Practical impact
A checklist that actually defends the deduction: (1) verify the supplier's VAT ID in the payer register and VIES on the transaction date, (2) for Czech suppliers check unreliable-payer status and the published bank account (Secs. 106a, 109 VAT Act), (3) store the time-stamped results with the invoice. Warning signs from the case law: price far below market, a supplier with no history, staff or assets, payments routed to third-party or foreign accounts, quick resales of unchanged goods in a short chain. If they appear, request a written explanation and file it — the authority proves your awareness, you prove reasonable measures, and a documented check is exactly that evidence.