Bulgarian VAT fraud leaves customer exposed

The European Court of Justice has confirmed a Bulgarian ruling where the receiver of services or goods is required to verify as far as practical that its suppliers are genuine taxable persons required to charge and collect VAT.

The victim of the fraud was a Bulgarian office supplies retailer who had received fraudulent invoices from a supplier that it was unaware of, and had deducted these against their own VAT liability.

During a VAT audit, the tax office identified suspicious elements and questioned if the supplies had actually ever taken place.  For instance, they claimed the office supplier had not taken sufficient precautions to check that the signatures on the invoices were actual signatories of their supplies.  They also questioned whether the supplier actually had the necessary equipment and resources to provide the paper suppliers, and if the paper supplier should have known this.  They raised an assessment against the VAT that had been charged and therefore deducted by the office supplier.

In its defence, the office supplier was able to produce full contracts and invoices, and show full and proper payments for the supplies via bank wire transfers. However, problems arose because the transactions were part of a chain supply, and the supplier did not take physical receipt of the goods.  It therefore did not realise there was a fraud taking place, and its supplier was actually part of a criminal gang hijacking the identity of a small company.

The question of the responsibilities of the office supplier to verify that its supplier was legitimate was passed to the European Court of Justice, the highest court of appeal for EU legal issues.  It agreed that the office supplier should have understood that its supplier did not have the wherewithal to provide the supplies purchased.  The office supplier therefore lost its right to reclaim the input VAT.