Reverse-charge mechanism

The director-cum-controlling shareholder knew, or should have known, that his cleaning business was indirectly involved in a value-added tax scam: this was how the Amsterdam Court of Appeal ruled in a case involving a cleaning contractor falsely laying claim to input tax. The director-cum-controlling shareholder’s familiarity with the cleaning industry should have ensured his being au fait with the prevailing reverse-charge mechanism.

The cleaning business had the actual work performed by subcontractors and by temps it recruited via a temporary employment agency. It applied the reverse-charge mechanism to, and thus refrained from including value-added tax in, the invoices it raised with its own clients. However, the invoices the actual service providers raised with the cleaning business were inclusive of value-added tax, which the cleaning contractor deducted in its tax returns without this being reflected in the service providers’ tax returns. All of which prompted the Court of Appeal to conclude that the service providers had deliberately refrained from applying the reverse-charge mechanism and as a result had understated their (self-assessed) value-added tax charge. This boiled down to supply chain fraud which the stakeholder concerned knew, or ought to have known, it was (indirectly) involved in as the director-cum-controlling shareholder from day one had been familiar with the industry and au fait with the reverse-charge mechanism. Even though it concerned a sourcing-cum-onward supply of services, the cleaning business’ director had been at a loss for words when prompted to justify why his business had applied the reverse-charge mechanism at the level of its clients while side-stepping it at that of its suppliers.

The Court decided that the sole explanation for what had come to pass was that the director-cum-controlling shareholder had been amenable to cooperating in a tax scam: the cleaning business had had no business seeking input tax deduction the way it had been doing and ended up copping an additional tax assessment.

Dutch version: Verleggingsregeling