C-354/03 Optigen and Others

JUDGMENT OF THE COURT (Third Chamber)

12 January 2006*

In Joined Cases C-354/03, C-355/03 and C-484/03,

REFERENCES for a preliminary ruling under Article 234 EC from the High Court of Justice of England and Wales, Chancery Division (United Kingdom), made by decisions of 28 July 2003 (C-354/03 and C-355/03) and 27 October 2003 (C-484/03), received at the Court on 18 August and 19 November 2003 respectively, in the proceedings

Optigen Ltd (C-354/03),

Fulcrum Electronics Ltd (C-355/03),

Bond House Systems Ltd (C-484/03)

v

Commissioners of Customs & Excise,

* Language of the case: English.

I - 5 00 THE COURT (Third Chamber),

composed of A. Rosas, President of the Chamber, J. Malenovský, J.-P. Puissochet, S. von Bahr (Rapporteur) and U. Lõhmus, Judges,

Advocate General: M. Poiares Maduro, Registrar: L. Hewlett, Principal Administrator,

having regard to the written procedure and further to the hearing on 8 December 2004,

after considering the observations submitted on behalf of:

— Optigen Ltd, by T. Beazley QC and J. Herberg, Barrister,

— Fulcrum Electronics Ltd, by R. Englehart QC and A. Lewis, Barrister,

— Bond House Systems Ltd, by K.P.E. Lasok QC and M. Patchett-Joyce, Barrister,

— the United Kingdom Government, by C. Jackson (C-354/03, C-355/03 and C-484/03) and K. Manji (C-484/03), acting as Agents, and by R. Anderson QC and I. Hutton, Barrister, — the Czech Government, by T. Boček, acting as Agent (C-354/03, C-355/03 and C-484/03),

Rahbøl Jacobsen, acting as Agents, — the Danish Government, by J. Molde and A.

and by P. Biering, advokat (C-484/03),

— the Council of the European Union, by A.-M. Colaert and J. Monteiro, acting as Agents (C-354/03 and C-355/03),

— the Commission of the European Communities, by R. Lyal, acting as Agent (C-354/03, C-355/03 and C-484/03),

after hearing the Opinion of the Advocate General at the sitting on 16 February 2005,

gives the following

Judgment

Legal context and the dispute

1The references for a preliminary ruling concern the interpretation of First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes (OJ, English Special Edition 1967, p. 14), as amended by Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1, 'the First Directive'), and the interpretation of Sixth Directive 77/388, as amended by Council Directive 95/7/EC of 10 April 1995 (OJ 1995 L 102, p. 18,'the Sixth Directive').

2The references were made in the course of three sets of proceedings brought by Optigen Ltd ('Optigen'), Fulcrum Electronics Ltd, in liquidation, ('Fulcrum') and Bond House Systems Ltd ('Bond House') against the Commissioners of Customs & Excise ('the Commissioners') concerning the rejection by the Commissioners of the claims for reimbursement of value added tax ('VAT') paid on the purchase in the United Kingdom of CPUs which were subsequently exported to another Member State.

Legal context

3Article 2 of the First Directive is worded as follows:

'The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged.

On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.

The common system of value added tax shall be applied up to and including the retail trade stage.'

4Under Article 2(1) of the Sixth Directive, a supply of goods or services effected for consideration by a taxable person acting as such is subject to VAT.

5Under Article 4(1) of the Sixth Directive, 'taxable person' means any person who independently carries out any economic activity specified in Article 4(2). The term 'economic activities' is defined in Article 4(2) as comprising all activities of producers, traders and persons supplying services, including the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis.

6Under Article 5(1) of that directive, '"[s]upply of goods" shall mean the transfer of the right to dispose of tangible property as owner'.

7Article 17(1) to (3) of the Sixth Directive provides:

'1. The right to deduct shall arise at the time when the deductible tax becomes chargeable.

I - 5 04 2. In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person;

(b) value added tax due or paid in respect of imported goods;

3. Member States shall also grant to every taxable person the right to a deduction or refund of the value added tax referred to in paragraph 2 in so far as the goods and services are used for the purposes of:

(a) transactions relating to the economic activities as referred to in Article 4(2) carried out in another country, which would be eligible for deduction of tax if they had occurred in the territory of the country;

The main proceedings

8According to the orders for reference, at the material time Optigen, Fulcrum and Bond House essentially carried on the business of buying CPUs from companies established in the United Kingdom and selling them to purchasers established in another Member State.

9Optigen claimed a net balance of refundable VAT in excess of GBP 7 million in its VAT return in respect of June 2002. By decisions of 16 and 31 October 2002, the Commissioners declined to allow an amount of just over GBP 7 million of that claim. Similarly, by a decision of 30 October 2002, the Commissioners disallowed the refund of just over GBP 13 million in respect of July of that year.

10Fulcrum claimed a net balance of input VAT of nearly GBP 7.2 million in its VAT return in respect of June 2002. By a decision of 11 November 2002, the Commissioners disallowed nearly GBP 2 million of the sum claimed. Similarly, in respect of July 2002 they disallowed about GBP 1.1 million out of a total claim of nearly GBP 4 million. In addition, in February 2003 the Commissioners issued an assessment against Fulcrum for nearly GBP 160 000 for input VAT which they claimed to have wrongly refunded to them in respect of May 2002.

11Bond House claimed a refund of approximately GBP 16.3 million for input VAT paid in its VAT return in respect of May 2002. That claim was refused by the Commissioners. In September 2002, the Commissioners informed the company that they accepted that, of the total sum claimed, just over GBP 2.7 million was allowable.

12According to the orders for reference, the transactions in question formed part of a chain of supply which, without the applicants in the main proceedings being aware of it, involved a defaulting trader, that is to say, a trader who incurs liability to VAT but goes missing without discharging that liability with the tax authorities, or a trader using a 'hijacked' VAT number, that is to say, a trader using a VAT number belonging to someone else, and thus, according to the Commissioners, constituted a carousel fraud.

13According to the orders for reference in Cases C-354/03 and C-355/03, and, according to the Commissioners in Case C-484/03, a carousel fraud generally operates as follows:

— A company (A) in one European Union Member State sells taxable goods to a company (B) in another Member State.

— Company B, which is the defaulting trader or the trader using the hijacked VAT number, sells the goods at a discount to another company (C), a buffer company, in the other Member State. Further sales can thereby be made at a profit. Company B incurs liability to VAT on the purchase of the goods, but, having used the goods for taxable transactions, it is also entitled to deduct that VAT as input VAT. On the other hand, it incurs liability for the output VAT it has charged to company C, but goes missing before discharging that liability to the tax authorities.

— In turn, company C sells the goods to another buffer company (D) in the other Member State, paying the tax authorities the output VAT charged after having deducted the input VAT paid, and so on until a company in the other Member State exports the goods to another Member State. Exports are exempt from VAT, but the exporting company is entitled to claim a refund of the input VAT paid on the purchase of the goods. When the purchaser in the last Member State is company A, there is a true carousel fraud.

— The process can be repeated.

14In Cases C-354/03 and C-355/03, the referring court states that the Commissioners based their decisions on the contention that, first, as regards the purchases in question in the main proceedings, Optigen and Fulcrum received no supplies used or to be used for VAT purposes, so that the amounts of VAT purportedly paid in respect of those purchases were not input tax within the meaning of the Value Added Tax Act 1994. Further, for the purposes of VAT, the relevant sales were not supplies made in the course of a business and do not therefore give any entitlement to a refund. Finally, the purchases and the sales, judged objectively, were devoid of economic substance and were not part of any economic activity. Accordingly, the purchases were not supplies used or to be used for the purposes of any economic activity and the sales were not supplies made in the course of an economic activity for the purposes of VAT.

15Optigen and Fulcrum appealed against the decisions of the Commissioners to the VAT and Duties Tribunal, London, which joined the two cases.

16By decision of 23 May 2003, the VAT and Duties Tribunal, London, dismissed the appeal brought by those companies, concluding that the Commissioners had legitimately maintained that the transactions in question fall outside the scope of VAT. It found that a trader does not have a right to a refund of input VAT paid on goods which it then sold to companies outside the United Kingdom, when there is a defaulting trader or a trader using a hijacked VAT number in the chain of supply, even though the trader claiming the refund was in no way involved in or had no knowledge of the failure of the other trader to fulfil its obligations or the hijacking of the VAT number, and the chains of supply which included the purchases and sales of the trader were part of a carousel fraud operated by third parties without its knowledge.

17Optigen and Fulcrum lodged appeals before the High Court of Justice of England and Wales, Chancery Division, against the decision of the VAT and Duties Tribunal, London.

18According to the order for reference in Case C-484/03, the Commissioners claim that the fact that the chains of supply at issue in the main proceedings had a fraudulent objective means that all the transactions which make it up, including those of Bond House, were devoid of economic substance. Accordingly, as the illegal transactions did not fall within the scope of VAT, the amounts which Bond House paid as input VAT to its suppliers under the guise of VAT were not VAT, and therefore did not give that company an entitlement to a refund of those amounts.

19Bond House lodged an appeal before the VAT and Duties Tribunal, Manchester, in August 2002.

20By judgment of 29 April 2003, amended by addendum of 8 May 2003, the VAT and Duties Tribunal, Manchester, held that 26 of the 27 purchases in question could not be regarded as economic activities within the meaning of the Sixth Directive and were therefore outside the scope of VAT. It found that those purchases formed part of a series of transactions having a fraudulent objective. Even though Bond House did not know of that objective and was innocent of any wrongdoing, those operations were devoid of economic substance and had to be evaluated according to objective criteria. It was therefore immaterial that the applicant in the main proceedings did not commit a breach. Finally, Bond House could not rely on the principle of the protection of legitimate expectations in support of its claim for a refund of the input VAT it had paid, and the Commissioners, in depriving Bond House of that refund, did not offend against the principles of proportionality or of legal certainty, and did not breach the applicant's human rights.

21Bond House lodged an appeal against that judgment before the High Court of Justice of England and Wales, Chancery Division.

The questions referred for a preliminary ruling and the procedure before the Court

22In Cases C-354/03 and C-355/03, the national court points out that the facts are assumed facts. It indicates that the following facts are relevant:

— There was a carousel fraud.

— Optigen and Fulcrum were innocent parties who were not involved in and had no knowledge of or reason to have knowledge of that fraud other than as ordinary buyers from a trader and ordinary sellers to a company in another Member State.

— Optigen and Fulcrum had no dealings with the defaulting trader or the trader using a hijacked VAT number.

— The nine purchases by Fulcrum in respect of which the VAT refund was disallowed would have looked no different to Fulcrum from any other of the 467 purchases it made during the relevant three-month period.

— At the time when Optigen and Fulcrum purchased the goods and paid input VAT, the 'carousel' was incomplete and a defaulting trader had not yet gone 'missing', so that at that time either of those events might not in fact occur.

23In Case C-484/03, the national court states that Bond House challenges a limited number of facts or conclusions of the VAT and Duties Tribunal, Manchester. The following facts are among those which are unchallenged:

— Bond House was well regarded by the Commissioners and was not suspected of any VAT fraud.

— Bond House did not know of the existence of the fraud alleged by the Commissioners and did not act recklessly.

— Bond House did not deal with any of the traders alleged by the Commissioners to have acted fraudulently.

— All the transactions effected by Bond House and the transactions that took place before and after Bond House had bought and sold the goods were genuine: the goods and the payments for them changed hands on every occasion.

— The transactions that the VAT and Duties Tribunal, Manchester, found to be devoid of economic substance were no different from other transactions in which Bond House engaged whose economic substance was not disputed, as there was no evidence that they formed part of a carousel fraud

24Bond House essentially submits that, as the purchases and supplies in question actually took place, it cannot be asserted that they did not amount to 'supplies' or 'economic activities' for the purposes of VAT merely because, elsewhere in the chain of supply and without the knowledge of Bond House, a fraudster had charged VAT to a customer and not accounted for that VAT to the Commissioners. Further, there is no reason to believe that transactions taking place before or after the fraudster had carried out the fraud and involving persons who had no knowledge of the fraud or the fraudster formed a part of the fraud or of the fraudster's plan. The decision of the VAT and Duties Tribunal, Manchester, is inconsistent with the common system of VAT. As a means of combating fraud, it is disproportionate and capable of having a deterrent effect on legitimate trade, contrary to Article 28 EC. It is also inconsistent with the principle of legal certainty because taxable persons can no longer even issue invoices bearing VAT or complete their VAT returns with any degree of certainty.

25The Commissioners essentially contend that transactions which form part of a carousel fraud are not economic activities within the meaning of the Sixth Directive. The 26 transactions at issue were therefore devoid of economic substance and were outside the scope of that directive. Those transactions were not part of any 'economic activity', nor were they 'supplies' to or by Bond House. The decision not to reimburse Bond House the VAT in question involves no breach of the principles of proportionality, legal certainty or respect for human rights.

26It is in those circumstances that the High Court of Justice of England and Wales, Chancery Division, decided to stay the proceedings and refer the following questions to the Court for a preliminary ruling:

In Cases C-354/03 and C-355/03:

'1. Under the common system of VAT, and in the light of [the First Directive] and [the Sixth Directive], is the entitlement of a trader to credit for a payment in respect of VAT under a transaction to be judged by reference to:

(a) only the particular transaction to which the trader was a party including the trader's purposes in entering into it, or

(b) the totality of transactions, including subsequent transactions, making up a circular chain of supply of which the particular transaction forms part including the purposes of other participants in the chain of which the trader has no knowledge and/or means of knowledge, and/or (c) the fraudulent acts and intention, whether arising prior or subsequent to the particular transaction, of other participants in the circular chain of whose involvement the trader is unaware and of whose acts and intentions the trader has no knowledge and/or means of knowledge, or

(d) some other, and if so what, criteria?

2. Does the exclusion from the VAT regime of transactions entered into by an innocent party, but which form links in a carousel fraud by others, infringe the general principles of proportionality, equal treatment or legal certainty?'

In Case C-484/03:

'1. Having regard to the general principles of EC law (in particular, the principles of proportionality and legal certainty) and to Article 28 [EC]:

(a) in the relevant circumstances, was the appellant a "taxable person acting as such" within Article 2(1) of the Sixth Directive when, in the 26 transactions, it acquired the CPUs from the UK vendors and sold them to the non-UK purchasers?

(b) in the relevant circumstances, was the appellant carrying on an "economic activity" within Article 4 of the Sixth Directive when, in the 26 transactions, it acquired the CPUs from the UK vendors and sold them to the non-UK purchasers?

(c) in the relevant circumstances, was the acquisition by the appellant, in the 26 transactions, of the CPUs from the UK vendors a "supply of goods" to the appellant within Article 5(1) of the Sixth Directive?

(d) in the relevant circumstances, was the sale by the appellant, in the 26 transactions, of the CPUs to the non-UK purchasers a "supply of goods" by the appellant within Article 5(1) of the Sixth Directive?

2. Do the answers to Question 1(a) to (d) above give rise to any breach of the general principles of Community law (in particular, the principles of proportionality and legal certainty)?'

27By order of the President of the Court of 19 September 2003, Cases C-354/03 and C-355/03 were joined for the purposes of the written procedure, the oral procedure and the judgment.

28Subsequently, by order of the President of the Court of 15 June 2004, those cases were joined with Case C-484/03 for the purposes of the oral procedure and the judgment.

The first questions

29By the first question in both cases, the referring court seeks essentially to know whether, first, transactions such as those at issue in the main proceedings, which are not themselves vitiated by VAT fraud, but which form part of a chain of supply in which another prior or subsequent transaction is vitiated by such fraud, without the trader engaged in the first transactions knowing or having any means of knowing, constitute supplies of goods or services effected by a taxable person acting as such and an economic activity within the meaning of Articles 2(1), 4 and 5(1) of the Sixth Directive and, second, whether, in such circumstances, the right of that trader to deduct input VAT may be limited.

Observations submitted to the Court

30Optigen and Fulcrum take the view that under the common system of VAT, and in the light of the First and Sixth Directives, the entitlement of a trader to credit for a payment in respect of VAT under a transaction is to be judged by reference to the particular transaction to which the trader was a party, including the trader's purposes in entering into it, and not by reference to prior or subsequent transactions of which the trader has no knowledge or means of knowledge, nor by reference to the fraudulent acts and intentions of other traders of whose involvement the trader is unaware and of whose acts and intentions the trader has no knowledge or means of knowledge.

31In the view of Bond House, the answer to the first question referred in Case C-484/03 should be in the affirmative.

32The United Kingdom Government maintains that under the common system of VAT, and in the light of the First and Sixth Directives, the entitlement of a trader to credit for a payment in respect of VAT under a transaction is to be judged by reference to the totality of transactions, including subsequent transactions, making up a circular chain of supply of which the particular transaction forms part, taking account of the purposes of other participants in the chain of which the trader has no knowledge and/or means of knowledge, and the fraudulent acts and intention, whether arising before or after the particular transaction, of other participants in the circular chain of whose involvement the trader has no knowledge and/or means of knowledge. All transactions within a circular chain of supply the only purpose of which is to perpetrate a fraud on the VAT system are, therefore, wholly outside the scope of the Sixth Directive, and the fact that some of those transactions involved an innocent trader is incapable of bringing them within the scope of the directive.

33The Czech Government submits that where the objective pursued by transactions such as those at issue in the main proceedings is unlawful, such transactions cannot be considered to be economic activities within the meaning of the Sixth Directive.

34The Danish Government is of the opinion, first, that it is for the party wishing to deduct VAT for a transaction involving a 'supply of goods' to prove that the right to dispose of the goods as owner was actually transferred to that party and, second, that transactions carried out in a closed circuit do not come within the scope of application of VAT as the taxable person, in becoming involved in such a circuit, does not act as a taxable person.

35The Commission of the European Communities contends that under the common system of VAT, and in the light of the First and Sixth Directives, the entitlement of a trader to credit for a payment in respect of VAT under a transaction should be judged by reference to the particular transaction to which the trader was a party. Transactions of which he has no knowledge and the fraudulent acts or intentions of other persons in the chain of supply of whose involvement he is unaware do not affect his entitlement. It follows that the exclusion from the VAT regime of a transaction which is to be regarded as a taxable supply is contrary to the Sixth Directive Findings of the Court

36It is to be remembered first of all that the Sixth Directive establishes a common system of VAT based, inter alia, on a uniform definition of taxable transactions (Case C-305/01 MKG-Kraflfahrzeuge-Factoring [2003] ECR 1-6729, paragraph 38).

37In that regard, the Sixth Directive assigns a very wide scope to VAT by mentioning, in Article 2, which concerns taxable transactions, in addition to importation of goods, supplies of goods and services effected for consideration within the territory of the country by a taxable person acting as such.

38As regards, first, the term 'supply of goods', Article 5(1) of the Sixth Directive provides that the transfer of the right to dispose of tangible property as owner is to constitute such a supply.

39According to the case-law of the Court, the term covers any transfer of tangible property by one party which empowers the other party actually to dispose of it as if he were the owner of the property (see, inter alia, Case C-320/88 Shipping and Forwarding Enterprise Safe [1990] ECR 1-285, paragraph 7, and Case C-25/03 HE [2005] ECR I-3123, paragraph 64).

40Then, according to Article 4(1) of the Sixth Directive any person who independently carries out in any place any economic activity is considered to be a taxable person, whatever the purpose or results of that activity.

41The term 'economic activities' is defined in Article 4(2) of the Sixth Directive as covering 'all' activities of producers, traders and persons supplying services and, according to the case-law, it comprises all stages of production, distribution and the provision of services (see, inter alia, Case C-186/89 Van Tiem [1990] ECR I-4363, paragraph 17, and MKG-Kmftfahrzeuge-Factoring, cited above, paragraph 42).

42Finally, as regards the expression 'taxable person acting as such', according to the case-law, a taxable person acts in that capacity where he carries out transactions in the course of his taxable activity (see, to that effect, Case C-291/92 Armbrecht [1995] ECR I-2775, paragraph 17, and Case C-77/01 EDM [2004] ECR I-4295, paragraph 66).

43As the Court held in paragraph 26 of its judgment in Case C-260/98 Commission v Greece [2000] ECR I-6537, an analysis of the definitions of taxable person and economic activities shows that the scope of the term economic activities is very wide, and that the term is objective in character, in the sense that the activity is considered per se and without regard to its purpose or results (see also Case 235/85 Commission v Netherlands [1987] ECR 1471, paragraph 8, and, to that effect, inter alia Case 268/83 Rompelman [1985] ECR 655, paragraph 19, and Case C-497/01 Zita Modes [2003] ECR I-14393, paragraph 38).

44In fact, that analysis and that of the definitions of 'supply of goods' and 'taxable person acting as such' show that those terms, which define taxable transactions under the Sixth Directive, are all objective in nature and apply without regard to the purpose or results of the transactions concerned.

45As the Court held in paragraph 24 of its judgment in Case C-4/94 BLP Group [1995] ECR I-983, an obligation on the tax authorities to carry out inquiries to determine the intention of the taxable person would be contrary to the objectives of the common system of VAT of ensuring legal certainty and facilitating application of VAT by having regard, save in exceptional cases, to the objective character of the transaction in question.

46An obligation on the tax authorities to take account, in order to determine whether a given transaction constitutes a supply by a taxable person acting as such and an economic activity, of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subsequent to the transaction carried out by that taxable person, of which that taxable person had no knowledge and no means of knowledge, would a fortiori be contrary to those objectives.

47As the Advocate General observed in point 27 of his Opinion, each transaction must therefore be regarded on its own merits and the character of a particular transaction in the chain cannot be altered by earlier or subsequent events.

48As regards the case-law relied on by the United Kingdom Government according to which a taxable person acquires that status definitively only if he made the declaration of intention to begin the envisaged economic activities in good faith (see, inter alia, Case C-400/98 Breitsohl [2000] ECR I-4321, paragraph 39, and Joined Cases C-110/98 to C-147/98 Gabaljrisa and Others [2000] ECR 1-1577, paragraph 46), suffice it to observe that, as the Advocate General pointed out in point 35 of his Opinion, that case-law concerns the intention to commence and thus engage in economic activities and not the intended purpose of the economic activities themselves.

49As regards the argument of the United Kingdom Government derived from the case-law of the Court to the effect that unlawful transactions fall outside the scope of VAT, it must be observed, first, that that case-law concerns products which by their very nature and because of their special characteristics may not be marketed or incorporated into economic channels. Second, it is settled case-law that the principle of fiscal neutrality prevents there being any general distinction as between lawful and unlawful transactions. Consequently, the mere fact that conduct amounts to an offence is not sufficient to justify exemption from VAT. That exemption applies only in specific situations where, owing to the special characteristics of certain products or certain services, any competition between a lawful economic sector and an unlawful sector is precluded (see, inter alia, Case C-158/98 Coffeeshop 'Siberië' [1999] ECR I-3971, paragraphs 14 and 21, and Case C-455/98 Salumets and Others [2000] ECR 1-4993, paragraph 19).

50It is common ground that this is not the case with the CPUs at issue in the main proceedings.

51It follows that transactions such as those at issue in the main proceedings, which are not themselves vitiated by VAT fraud, constitute supplies of goods or services effected by a taxable person acting as such and an economic activity within the meaning of Articles 2(1), 4 and 5(1) of the Sixth Directive, where they fulfil the objective criteria on which the definitions of those terms are based, regardless of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subsequent to the transaction carried out by that taxable person, of which that taxable person had no knowledge and no means of knowledge.

52Nor can the right to deduct input VAT of a taxable person who carries out such transactions be affected by the fact that in the chain of supply of which those transactions form part another prior or subsequent transaction is vitiated by VAT fraud, without that taxable person knowing or having any means of knowing.

53As the Court has repeatedly held, the right to deduct provided for in Article 17 et seq. of the Sixth Directive is an integral part of the VAT scheme and in principle may not be limited. It must be exercised immediately in respect of all the taxes charged on transactions relating to inputs (see, in particular, Case C-62/93 BP Supergas v Greek State [1995] ECR I-1883, paragraph 18, and Gabalfrisa and Others, cited above, paragraph 43).

54The question whether the VAT on the earlier or later sale of the goods concerned to the end-user has or has not been paid to the public purse is irrelevant to the right of the taxable person to deduct input VAT (see, to that effect, the order of the Court in Case C-395/02 Transport Service [2004] ECR I-1991, paragraph 26). The Court has consistently held that, according to the fundamental principle which underlies the common system of VAT, and which follows from Article 2 of the First and Sixth Directives, VAT applies to each transaction by way of production or distribution after deduction of the VAT directly borne by the various cost components (see, inter alia, Case C-98/98 Midland Bank [2000] ECR I-4177, paragraph 29, and Zita Modes, cited above, paragraph 37).

55Therefore, the answer to the first question referred for a preliminary ruling in each case should be that transactions such as those at issue in the main proceedings, which are not themselves vitiated by VAT fraud, constitute supplies of goods or services effected by a taxable person acting as such and an economic activity within the meaning of Articles 2(1), 4 and 5(1) of the Sixth Directive, where they fulfil the objective criteria on which the definitions of those terms are based, regardless of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subsequent to the transaction carried out by that taxable person, of which that taxable person had no knowledge and no means of knowledge. The right to deduct input VAT of a taxable person who carries out such transactions cannot be affected by the fact that in the chain of supply of which those transactions form part another prior or subsequent transaction is vitiated by VAT fraud, without that taxable person knowing or having any means of knowing.

The second questions

56In the light of the answer given to the first question in each case, there is no need to answer the second question in each case.

Costs

57Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.

Operative part

On those grounds, the Court (Third Chamber) hereby rules:

Transactions such as those at issue in the main proceedings, which are not themselves vitiated by value added tax fraud, constitute supplies of goods or services effected by a taxable person acting as such and an economic activity within the meaning of Articles 2(1), 4 and 5(1) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995, where they fulfil the objective criteria on which the definitions of those terms are based, regardless of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subsequent to the transaction carried out by that taxable person, of which that taxable person had no knowledge and no means of knowledge. The right to deduct input value added tax of a taxable person who carries out such transactions cannot be affected by the fact that in the chain of supply of which those transactions form part another prior or subsequent transaction is vitiated by value added tax fraud, without that taxable person knowing or having any means of knowing.

[Signatures]

OPINION OF ADVOCATE GENERAL

POIARES MADURO delivered on 16 February 2005 1

Introduction

1In three cases concerning unwitting participants in a type of VAT fraud characterised as 'carousel fraud' the High Court of Justice of England and Wales, Chancery Division, asks the Court if transactions constituting part of a fraud scheme set up by others qualify as economic activities within the meaning of Article 4(2) of the Sixth Council Directive 77/388/EEC. 2

2The request for a preliminary ruling arises from appeal proceedings before the High Court of Justice (Chancery Division) in the cases of Optigen Ltd ('Optigen'), Fulcrum Electronics Ltd ('Fulcrum'), and Bond House Systems Ltd ('Bond House'). The respondents in each case are the Commissioners of Customs and Excise. The appeals of Optigen and Fulcrum are directed against a decision of the VAT and Duties Tribunal, London. The appeal of Bond House is directed against

1 — Original language: Portuguese.

2 - Sixth Council Directivi' 777388. EEC' of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (Ol 1977 L 145. p. 1: 'the Sixth Directive').

a decision of the VAT and Duties Tribunal, Manchester. In both decisions it was held in essence that transactions forming part of a carousel fraud fall outside the scope of VAT.

I — Relevant provisions of Community law

3Article 2 of the First Council Directive 3 67/227/EEC sets out the essence of the common system of VAT:

'The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever

3 - First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation in the Member States concerning turnover taxes (Ol. English Special Edition 1967. p. 14; 'the First Directive').

the number of transactions which take place in the production and distribution process before the stage at which tax is charged.

On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.'

4Under Article 2(1) of the Sixth Directive a supply of goods or services effected for consideration by a taxable person acting as such is subject to VAT.

5Article 4(1) of the Directive provides that 'taxable person' is to mean 'any person who independently carries out in any place any economic activity specified in Paragraph 2, whatever the purpose or results of that activity'.

6'Economic activities' are defined in Article 4(2) as comprising 'all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions'. Article 4(2) goes on to provide that: 'The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity'.

II — Facts and reference for a preliminary ruling

A — General background: 'carousel fraud'

7In its decision in the case of Bond House the VAT and Duties Tribunal, Manchester, provides a clear explanation of what the 4 Commissioners describe as carousel fraud :

'In its simplest form a carousel fraud works in this way. A VAT-registered trader ("A") in one EuropeanUnionMemberState sells taxable goods to a VAT-registered trader ("B") in another MemberState. A's sale to B is

4 — Decision of 29 April 2003 of the VAT and Duties Tribunal, Manchester (chairman: Colin Bishopp), Bond House Systems Limited v C&E, paragraphs 15 to 18 (footnotes added). [5 zero-rated in As Member State. ] B should declare the purchase and pay acquisition tax in its own Member State, and, upon the premise that it is intending to use those goods in order to make an onward taxable supply, then claim credit for the same amount as input tax. Usually, if it is a participant in a carousel fraud, it does neither. B then sells the goods to another VAT-registered trader ("C") in its own MemberState, charging and receiving VAT on the consideration. However, it fails to account to the tax authorities for that VAT and effectively disappears; it becomes what [the Commissioners] refer to as a "missing trader". Nevertheless, at the time of making its sale to C, while it is still registered for VAT and before the Commissioners are aware that it is or might become a missing trader and have been able to intervene (for example, by de-registering B) it provides a VAT invoice to C, which claims the VAT it has paid to B as input tax. C (to whom the Commissioners refer as a "broker") then sells the goods to a registered trader in another MemberState: the hallmark of the simplest fraud is that this purchaser is A, and it is this circularity which gives rise to the term "carousel fraud". C has an input tax claim but, because its sale to A is zero-rated in C's own Member State, is not required to [6 account for any output tax. ] The result, if the fraud is successful, is that B has received, but not accounted for, the VAT which the tax authorities must pay to C. In this situation B is certainly fraudulent and A probably so; C may well be entirely ignorant of what is happening, and of the use which is being made of its participation. ... B's objective, as the Commissioners perceive the matter, is

5 — According to Article 28c(A)(a) of the Sixth Directive, the supply of goods to an operator m another Member State shall be exempted from VAT. In the wording of the UK Value Added Tax Act 1994 the supply is 'zero-rated'.

6 — As noted above, the supply of goods to an operator in another Member State is exempted front VAT. The vendor is entitled to recover input tax pursuant to Article 17(2)(d) of the Sixth Directive as inserted by Article 28f¹ thereof.

not to buy and sell in the ordinary course of business, but to put itself in a position to receive VAT ... The goods are no more than a token, necessary to lend verisimilitude to the transactions ... A (at least, if it is participant in the fraud) likewise has no genuine business motive in buying back that which it has just sold. Though it is possible that A, too, is an unwitting participant if the goods are sold to it by C for a price lower than that at which it has sold them to B (or lower than a price for which, allowing for market movements, it could sell them in the future), the Commissioners' theory is that A and B are acting in concert and that re purchase by A is desirable, partly for reasons of control and partly because it is simpler and cheaper to use a finite quantity of goods several times rather than to buy a fresh supply in the open market for each sequence ... B, knowing it will gain from its failure to account for the output tax it has incurred, can afford to sell goods to C for less than it paid to A, and will do so if necessary in order to secure a sale.'

8Endless variations on the chain of transactions are imaginable, considerably more complicated than the one described above, and in reality the same goods may be 'sent around' several different chains. Still, the problem fundamentally remains the same: a trader collects an amount paid to him as VAT but does not account for it to the tax authorities. The defaulting trader may use a 'hijacked' VAT number or it may register itself for VAT and simply disappear before the tax authorities take action.

9There appears to have been an increase in this type of fraud in intra-Community trade over the past few years and it currently represents a major concern for Member States. Although the exact amount of money involved is difficult to quantify, it clearly causes a considerable loss of national rev 7 enue.

B — Facts in the present cases

10The facts in the present cases as they appear from the orders for reference from the High Court of Justice are as follows.

7 — Report from the Commission to the Council and the European Parliament on the use of administrative cooperation arrangements in the fight against VAT fraud, 16 April 2004, COM(2004) 260 final.

I - 4 88 (a) The facts in the cases of Optigen and Fulcrum

11Optigen and Fulcrum were traders, mainly in computer chips, which they purchased from companies in the United Kingdom and sold to customers located in other Member States. Optigen and Fulcrum, so it is accepted, became innocent parties to a number of transactions comprising a carousel fraud. They had no dealings with the trader that went 'missing', nor did they have knowledge of, or reason to know of, their involvement in a scheme of transactions other than as ordinary buyers from a trader and ordinary sellers to a company in another Member State. The Commissioners declined VAT returns submitted by Optigen and Fulcrum on the basis that the relevant purchases and sales were devoid of economic substance and were not part of any economic activity. According to the Commissioners, the purchases were not supplies used or to be used for the purposes of a business and the sales were not supplies made in the course of a business for the purposes of VAT.

12Optigen and Fulcrum appealed against the decisions of the Commissioners to the VAT and Duties Tribunal, London, which joined the two cases. By decision of 1 May 2003, the VAT and Duties Tribunal dismissed the appeal of Fulcrum and Optigen, concluding that the Commissioners had rightly maintained that the transactions in question fell outside the scope of VAT. It found that a trader does not have a right to a refund of input VAT paid on goods which it then sold to companies outside the United Kingdom, when there is a defaulting trader or a trader using a hijacked VAT number in the chain of supply, even though the trader claiming the refund was in no way involved in, and had no knowledge of, the failure of the other trader to fulfil its obligations or the hijacking of the VAT number, and the chains of supply which included the purchases and sales by the trader were part of a carousel fraud operated by third parties without its knowledge. Optigen and Fulcrum each lodged appeals before the High Court of Justice against the decision of the VAT and Duties Tribunal.

(b) The facts in the case of Bond House

13Bond House was, at the material time, a company incorporated in England and Wales and was a dealer in computer components. The larger part, by value, of its business was the bulk purchase of processor chips ('CPUs') from traders registered for VAT in the United Kingdom, which it sold to traders registered for VAT in other Member States. In May 2002, while trading as it was before, Bond House made a number of purchases and sales of CPUs. Part of these sales — 51 transactions representing approximately 99% of Bond House's turnover in May 2002 — was to customers in another MemberState. In each instance, Bond House bought the CPUs from a UK supplier at what it considered a fair market value, it took delivery of them and paid to the supplier the agreed price, plus an amount charged to it by way of VAT. It delivered the CPUs to its overseas customers for a somewhat higher price than it had paid itself. These supplies being zero-rated, Bond House made a VAT return for May 2002 which claimed a repayment of the amount it had paid on its purchases by way of VAT. The Commissioners of Customs and Excise refused Bond House's input tax claim with regard to 27 purchases.

14Bond House appealed against the decision of the Commissioners to the VAT and Duties Tribunal, Manchester. By decision of 29 April 2003, amended by addendum of 8 May 2003, the VAT and Duties Tribunal concluded that 26 of the 27 purchases could not be regarded as economic activities within the meaning of the Sixth Directive and were outside the scope of VAT. It found that those purchases formed part of a series of transactions having a fraudulent objective. Even though Bond House did not know of that objective and was innocent of any wrong doing, those operations were devoid of economic substance. They had to be evaluated according to objective criteria. It was therefore immaterial that Bond House did not act unlawfully. Finally, Bond House could have no legitimate expectation that its claim for a refund of the input VAT it had paid would be met, and the Commissioners, in depriving Bond House of that refund, did not offend against the principles of proportionality or of legal certainty and did not breach its human rights. Bond House lodged an appeal against that decision before the High Court of Justice. The High Court notes in its order for reference that Bond House did not know of the fraud alleged by the Commissioners and that the company did not act recklessly in conducting its business.

C — Questions referred for a preliminary ruling

15Considering that the applicable national law — the Value Added Tax Act 1994 — has to be interpreted in light of the Community common system of VAT, the High Court of Justice seeks guidance as to how to establish whether the transactions at issue fall within the scope of that system. In the present case it is in dispute whether Bond House, Fulcrum and Optigen were carrying out an economic activity when unwittingly acting as part of a 'carousel'. The High Court of Justice essentially asks whether transactions such as those at issue qualify as economic activities within the meaning of Article 4(2) of the Sixth Directive and whether, in order to make this assessment, regard should be had to the chain of transactions as a whole or to each transaction individually.

16Written observations have been submitted by Optigen, Fulcrum and Bond House; by the governments of the United Kingdom and Denmark; by the Council; and by the Commission. At the hearing held on 8 December 2004 the Court heard oral argument from Optigen, Fulcrum and Bond House, from the governments of the United Kingdom, the Czech Republic and Denmark, as well as from the Commission. The Council decided not to present oral argument after it had become clear that none of the parties would question the validity of provisions of the Sixth Directive.

III — Assessment

17Obviously, the trade in CPUs is usually regarded as an economic activity. The following analysis will therefore focus principally on the reasons why, in the United Kingdom's view, that is not the case in these circumstances. First, I shall examine the proposition that the nature of the transactions must be assessed by reference to the carousel scheme as a whole. Secondly, I shall discuss the idea that regard must be had to the underlying fraudulent purpose of the transactions. 1 shall subsequently consider the implications of case-law in which it has been held that certain unlawful activities fall outside the scope of VAT. Fourthly, I shall discuss the issue of legal certainty, an element on which Optigen, Fulcrum and Bond House have placed much emphasis in their oral and written submissions. The final part will offer some reflections in view of the need to address carousel fraud.

A — The view that the carousel must be regarded as a whole

18Optigen, Fulcrum, Bond House and the Commission maintain that the transactions qualify as economic activities within the meaning of Article 4(2) of the Sixth Directive. According to them, the purchase and sale of CPUs is in itself an economic activity. The fact that other persons initiated a chain of transactions to defraud the tax authorities has no bearing on the nature of the transactions to which Bond House, Optigen and Fulcrum were party.

19The governments of Denmark and the Czech Republic support the United Kingdom's submission that the transactions do not qualify as economic activities within the meaning of that directive. The United Kingdom argues that transactions which form part of a carousel fraud fall outside the scope of the Sixth Directive, because they are not genuine economic activities; their ultimate purpose is the misappropriation of money paid as VAT, rather than the release of products onto the market for consumption. Since no VAT is payable on the transactions, there can be no basis for the recovery of VAT. The argument applies to each link in the carousel because, without the fraud scheme, none of the transactions would have taken place.

20Crucial to the United Kingdom's line of reasoning is the view that the carousel scheme must be regarded as a whole in order to determine whether VAT applies to the separate transactions therein. I do not share this view.

21The Court has repeatedly held that the scope of the term 'economic activity' in Article 4(2) of the Sixth Directive is wide and that the term is objective in character. Exemptions from the scope of VAT must be expressly provided for and precisely defined. 9 As the Court stated in Rompelman '[t]he common system of value-added tax ... ensures that all economic activities, whatever their purpose or results ... are taxed in a 10 wholly neutral way'. In its judgment of 26 March 1987 in Commission v Netherlands the Court held that in order to determine whether an activity is an economic activity for the purposes of the common system of VAT, 'the activity is considered per se and without regard to its purpose or results'.

22The United Kingdom relies on the 12 rulings in Faaborg-Gelting Linien and 13 Stockholm Lindöpark to argue that transactions must be considered in the light of the circumstances in which they take place in order to ascertain whether they are subject to VAT. However, those judgments are not authority for the conclusion that a supply chain must be considered as a whole in order to determine whether the transactions forming part of it qualify as an economic activity.

23In Faaborg-Gelting Linien the Court was asked whether restaurant transactions qualify as supplies of goods or as supplies of services under the Sixth Directive. It held that restaurant transactions must be regarded as supplies of services, because they are characterised by a cluster of features and acts, of which the provision of food is only one component and in which services 14 largely predominate.

24Stockholm Lindöpark concerned the question whether the activity of running a golf course should, for the purposes of determining whether it may be considered exempt from VAT, be classified as the letting of immovable property or as the supply of services linked to the practice of sport or physical education. The Court found that 'the activity of running a golf course generally entails not only the passive activity 8 — E.g. Case 235/85 Commission v Netherlands [1987] ECR 1471, paragraph 8; Case 268/83 Rompelman [1985] ECR 655, paragraph 19; Case C-186/89 Van Tiem [1990] ECR I-4363, of making the course available but also a large number of commercial activities, such paragraph 17; Case C-305/01 MKG-Kraftfahrzeuge-Factary [2003] ECR I-6729, paragraph 42.

9 — Commission v Netherlands, paragraph 19.

10 — Rompelman, paragraph 19; Case 50/87 Commission v France [1988] ECR 4797, paragraph 15.

11 — Commission v Netherlands, paragraph 8.

12 - Case C-231/94 [1996] ECR I-2395.

13 — Case C-150/99 [2001] ECR I-493.

14 — Faaborg-Gelting Linien, paragraph 14. The Court noted that the situation is different 'where the transaction relates to "take-away" food and is not coupled with services designed to enhance consumption on the spot in an appropriate setting'. as supervision, management and continuing maintenance by the service-provider, provi 15 sion of other facilities and so forth.' Therefore, in the absence of quite exceptional circumstances letting out a golf course cannot constitute the main service sup 16 plied.

25Neither in Faaborg-Gelting Linien nor in Stockholm Lindopark was it in doubt that the activities at issue were economic in nature. Both cases involved taxable transactions under the Sixth Directive. However, instead of breaking the taxable transaction down into its various parts in order to tax them separately, the Court applied the principle of 'the unity of the supply', as Advocate General Ruiz-Jarabo Colomer observed in his 7 Opinion in Hotel Scandic Gåsabäck. 1

26Moreover, the circumstances taken into account by the Court in Faaborg-Gelting Linien concerned a cluster of acts performed on the same occasion in connection with a single transaction by one taxable person.

15 — Stockholm Lindopark, paragraph 26.

16 — Ibidem.

17 — Case C-412/03 [2005] ECR I-743, at point 21. Cf. Case C-275/01 Sinclair Collis [2003] ECR 1-5965. paragraphs 25 to 30.

In Stockholm Lindopark the Court looked at a cluster of acts that, taken together, constituted one economic activity.

27In contrast, carousel fraud concerns a series of consecutive activities, performed by a number of traders in a supply chain. It is an essential feature of the common system of VAT that VAT becomes chargeable on each 8 transaction in a supply chain. 1 Each transaction must therefore be regarded on its own merits. Consequently, the character of a particular transaction in the chain cannot 19 be altered by earlier or subsequent events.

28The United Kingdom correctly submits that VAT must be applied in accordance with the actual economic situation. However, this does not imply that the character of a transaction in a supply chain must be determined by reference to the whole chain. Quite the opposite, the case-law reaffirms the rule that an activity must be considered objectively and per se when it states that regard must be had to the actual economic

18 — See Article 2 of the First Council Directive.

19 - To that effect: Case C 158/98 Coffeeshop Siberie [1999] ECR 1-3971 paragraph 22.

situation and that legal form is not con 20 clusive.

29The rule that each transaction must be considered individually and per se, without regard to its purpose or results, is founded on the requirement that the common system of VAT should be neutral and on the principle of legal certainty, which requires that the application of Community legisla 21 tion be foreseeable by those subject to it. It ensures that, at the time of the taxable transaction, it can in principle be determined whether or not that transaction comes within the scope of the Sixth Directive.

B — The underlying purpose of the transactions

30The United Kingdom furthermore submits that it is necessary to look at the 22 underlying purpose of the transactions, which in this instance is to commit fraud. Without this purpose, the carousel and all its constituent transactions would not have

2 0 - To that effect: Case C-8/03 BBL (2004] ECR I-10157, paragraph 36; Case C-77/01 EDM [2004] ECR I-4295, paragraph 48; Van Tiem, paragraph 18; Rompelman, paragraph 23.

existed as a normal economic phenomenon. Optigen argues that this viewpoint is in fact subjective, because it adopts the perspective of the defaulting trader, while disregarding the intentions of the other traders. Yet, according to the United Kingdom, its view point is based not on the intentions of one particular trader but on the objective deduction that the goods circulated as part of a carousel scheme which did not serve an economic purpose.

31That argument must be rejected, if only for the reason that it is based on an assessment of the purpose and results of the entire chain, instead of the characteristics of each individual transaction. The assertion that the transactions ultimately did not have an economic purpose is based on a range of circumstances which go beyond the factors that determine whether a transaction in the chain falls within the scope of VAT. As I concluded above, each transaction must be considered individually, without regard to its purpose or result. The character of a transaction in a chain is not affected by the fact that goods subsequently pass through 21 — See, for example, Case 70/83 Kloppenburg [1984] ECR 1075, paragraph 11; Case 348/85 Denmark v Commission [1987] ECR 5225, paragraph 19; Case C-209/96 United Kingdom v Commission [1998] ECR I-5655, paragraph 35; Case C-301/97 Netherlands v Council [2001] ECR I-8853, paragraph 43; Case C-17/01 Sudholz [2004] ECR I-4243, paragraph 34.

22 — In this regard the United Kingdom refers to Case C-155/94 Wellcome Trust [1996] ECR I-3013, paragraphs 31 to 36; Case C-60/90 Polysar Investments [1991] ECR I-3111, paragraph 12.

the hands of the same trader. The aim of misappropriating money may have been at the origin of the chain of transactions, but such misappropriation is an activity in its own right; it is not inherent in the activity of trading CPUs and it does not alter the character of individual transactions elsewhere in the chain.

32Clearly, the United Kingdom attaches particular importance to the fact that the underlying purpose of the carousel is to commit what it considers to be VAT fraud.

33Yet, contrary to what the United Kingdom suggests, it does not follow from the 2 M Court's position in Breitsohl 3 and INZO that an activity may be deprived of its economic nature when it is carried out for fraudulent purposes or when, on account of its result, it somehow facilitates fraud.

34An altogether different issue is concerned when a person applying to deduct VAT makes false declarations about his status as a taxable person. This was the issue addressed in Breitsohl and INZO. The Court held that 'a taxable person acquires that status definitively only if the person concerned made the declaration of intention to begin the envisaged economic activities in good faith. In cases of fraud or abuse, in

23 - Case C-400/98 [2000) ECU 1-4321.

24 - Case C-110/94 [1996| ECR 1-857.

which, for example, the person concerned, on the pretext of intending to pursue a particular economic activity, in fact sought to acquire as his private assets goods in respect of which a deduction could be made, the tax authority may claim repayment of the sums retroactively on the ground that those deductions were made on the basis of false 2 declarations'. 4

35That case-law acknowledges that tax authorities may require Objective evidence in support of a person's declared intention to pursue an economic activity which will give rise to taxable transactions, and in the absence of such evidence may refuse the 2 right to deduct'. 5 That issue is not relevant in the present case. First, it is not asserted either that Fulcrum, Optigen and Bond House applied for a VAT deduction on the basis of false declarations made by them or that they did not intend to pursue economic activities. Secondly, a clear distinction should be drawn between the intention to engage in

25 — INZO, paragraph 24. See also: Breitsohl. paragraph 39; Jomed Cases C-110/98 to C'-147/98 Gabalfrtsa and Others [2000] ECR 1-1577.

26 — Opinion of Advocate General Jacobs in Case C-32/03 I/S Fun H, paragraph 21.

economic activities and the intended pur-27 pose of the economic activities themselves.

36Moreover, the United Kingdom's submission that particular importance should be attached to the fact that the underlying purpose of the transactions is fraud would, were it accepted, be hard to reconcile with the text of Article 4(1) of the Sixth Directive, which refers to any economic activity, whatever the purpose or results of that activity. In fact, such an approach would disregard the objective character of the concept of 'economic activity' and would produce the incongruous result of an entire supply chain falling outside the scope of the Sixth Directive merely because one trader in the chain has failed to account for VAT to the tax authorities. Such an outcome is particularly puzzling since it would mean that, as a result of that trader's failure to account for VAT, he would in fact be under no obligation to pay VAT in the first place.

27 — A comparison between the following two situations may clarify this point. Situation I: X declares he will open a restaurant and acquires the (provisional) status of taxable person. He buys chairs, tables and other equipment and applies for a VAT deduction. However, he never opens the restaurant. Situation II: Y opens a restaurant and uses it to operate a swindle. He provides restaurant services and charges VAT to his customers, but then suppresses the recorded takings in an attempt to deceive the tax authorities and retain part of the VAT received. Situation I casts a shadow of doubt on X's status as a taxable person. The tax authorities may require objective evidence in support of X's declared intention and assess whether X did in fact intend to pursue restaurant activities (see e.g. INZO, cited above; Case C-37/95 Ghent Coal Terminal [1998] ECR 1-1; Case C-396/98 Schloßstraße [2000] ECR I-4279). Conversely, situation II does not affect Y's status as a taxable person, because Y does carry out an economic activity: he provides restaurant services. It follows from Article 4(1) of the Sixth Directive that the purpose or result of that activity does not affect his status as a taxable person.

C — Unlawful activities and the scope of VAT

37The United Kingdom suggests that there is a parallel between the present cases and cases in which the Court has held that certain unlawful activities do not qualify as economic activities and therefore fall outside the scope of the common system of VAT. I do not find that analogy convincing.

38According to well-established case-law, the principle of fiscal neutrality precludes a generalised differentiation between lawful 28 and unlawful activities. In principle even unlawful transactions fall within the scope of 29 the Sixth Directive and are subject to VAT. The only exception is when an activity falls completely outside the lawful economic 30 sector because of its special characteristics. For example, the supply of narcotic drugs falls outside the scope of the Sixth Direct 31 ive, whereas the operation of an unlawful

28 — E.g. Rompelman, paragraph 19; Case C-283/95 Fischer [1998] ECR 1-3369, paragraph 28.

29 — Case 294/82 Senta Einberger [1984] ECR 1177; Case C-111/92 Lange [1993] ECR I-4677, paragraph 16; Case 289/86 Happy Family [1988] ECR 3655, paragraph 20; Case 269/86 Mol [1988] ECR 3627, paragraph 18; Case C-3/97 Goodwin and ¡Instead [1998] ECR I-3257, paragraph 9; Case C-455/98 Salumets and Others [2000] ECR I-4993, paragraph 19.

30 — Happy Family, paragraph 20; Mol, paragraph 18.

31 — Senta Einberger; Happy Family, paragraph 23..

game of roulette falls within that scope, since the latter is in competition with lawful 32 gambling activities.

39However, unlike narcotic drugs or counterfeit currency, CPUs are not, in the words of the Court, by definition subject to a total prohibition on importation and marketing in 3 the Community. 3 The exclusion from the scope of the VAT system relates only to products which by their very nature and because of their special characteristics may not be marketed or incorporated into 34 economic channels. This is not the case with CPUs.

40Secondly, contrary to what the United Kingdom argues, the trade in CPUs does not fall completely outside the lawful economic sector because the chain of transactions ultimately turns out to be circular. As becomes clear from the Commissioners'

32 — Fischer, paragraphs 19 to 23 and 28. As to the legal basis of the Court's reasoning Advocate General ļacobs' remarks at W'llzeinann paragraph 20 of his Opinion m that 'the true basis of the rule is somewhat obscure' and that 'it cannot ... be suggested that there is any fundamental principle of law precluding the taxation of illicit transactions': Case C-343/89 Witzcmmm (1990) ECR 1-4477. The Court considers, in essence, that VAT applies to activities coming within the scope of the normal economic sector, either because they are legitimate or because they may compete with legitimate economic activities; outside that area the principle of fiscal neutrality does not come into play. See also: Opinion of Coffeeshop Siberie, Advocate General Fennelly in at point 16.. Sentei Etnberger. Wilzeniaiin. 33 — paragraph 15. See also and point 20 of the Opinion of Advocate General Léger in Goodwin and Unstead. Salumets and Others, Fischer, 34 — paragraphs 19 and 21; Lange, paragraph 20; paragraph 12. own description of what they consider to constitute carousel fraud, its characteristic is that it makes use of lawful economic channels in order to facilitate the retention of money paid as VAT.

D — The principle of legal certainty

41If the Court were to accept the interpretation advocated by the United Kingdom, that would give rise to considerable uncertainty concerning the application of the Sixth Directive. Such an interpretation would mean that, if traders wanted to be sure at the time of a transaction that they were incurring rights and obligations under the VAT system, they would have to predict whether the specific goods which were the subject of the transaction would at some point fall back into the hands of a trader who had already played a part in the supply chain. If that were to be the case, they would also need to know about any subsequent 'disap35 pearance' on the part of that trader. Meanwhile, account should be taken of the

35 — Only when these conditions occur cumulatively would the United Kingdom's theory apply. Neither the circularity of the supply chain nor the fact that there is or will be a defaulting trader would by itself be sufficient to conclude that a transaction falls outside the scope of VAT. 'Missing trader fraud' may happen in a linear supply chain, in which case the transactions in the chain would nevertheless fall within the system of VAT. Circular trade may come about as a normal economic phenomenon in certain commodity markets. The system of VAT is designed to cope with this phenomenon and the transactions remain subiect to VAT, whether or not the traded goods actually end up with a consumer. possibility that one and the same consignment may contain goods that are used in the fraud and goods that are not — only the latter would be subject to VAT, if the United Kingdom's argument were accepted. This interpretation of the notion of 'economic activity' runs counter to the principle of legal certainty, which is a general principle of Community law that must be observed by Member States when implementing the 36 Sixth Directive. As Optigen, Fulcrum and Bond House moreover correctly submit, the United Kingdom's approach might act as a deterrent to legitimate trade.

E — Ways of tackling carousel fraud

42The United Kingdom seems to envisage combating carousel fraud — or at least

36 — To the same effect: Joined Cases C-487/01 and C-7/02 Gemeente Leusden and Holin [2004] ECR I-5337, paragraphs 57, 58, 65 and 69. By analogy: Case C-4/94 BLP [1995] ECR I-983, paragraph 24. See also: Case C-381/97 Belgocodex dispensing with the problems it poses — by limiting the scope of the VAT system. To my mind, the Court should not consent to this approach. It would drastically shift the burden of the problem from the tax authorities to the private sector, at the expense of legitimate trade and the proper functioning of the VAT system. Moreover, it would deter Member States from taking appropriate measures against carousel fraud. In this regard it is particularly worthy of note that where an activity falls within the scope of the Sixth Directive, that does not mean that Member States lose their power to take 37 action against it. In fact, Article 21 of the Sixth Directive gives Member States the opportunity to introduce joint and several fiscal liability. A taxable person can accordingly be held accountable for the payment of VAT due by his co-contractor, if he knew or should have known of his co-contractor's 38 fraudulent activities. Several Member States have adopted measures of that kind 39 against carousel fraud.

[1998] ECR 1-8153, paragraph 26; Schloßstraße, paragraph 44; Case C-62/00 Marks & Spencer [2002] ECR 1-6325, paragraph 44; Case 316/86 Krücken [1988] ECR 2213, paragraph 22. The Court has consistently held that the requirement of legal certainty must be observed all the more strictly in the case of rules liable to entail financial consequences, in order that those concerned may know precisely the extent of their rights and obligations. See, for example, Case 325/85 Ireland v Commission [1987] ECR 5041, paragraph 18; Case 326/85 Netherlands v Commission [1987] ECR 5091, paragraph 24; Sudholz, paragraph 34; and, 37 — Illegal gambling, for example, is an economic activity in the sense of Article 4(2) of the Sixth Directive; of course, that does not preclude Member States from taking action against illegal gambling: Fischer. See also, expressly, paragraph 24 of the judgment in Lange.

38 — It is in this context that the issue as to whether the traders in actual fact knew or should have known about the existence of a fraud scheme should be dealt with and not, as the Danish government suggests, in the context of the definition of 'economic activity'.

to the same effect, Case 169/80 Gondrand Frères [1981] ECR 1931, paragraph 17.

39 — Including, in the meantime, the United Kingdom (see Section 18 of the Finance Act 2003).

IV — Conclusion

43Based on these considerations I am of the view that the Court should give the following answer to the High Court of Justice:

In order to determine whether a transaction in a supply chain qualifies as an economic activity within the meaning of Article 4(2) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, the transaction must be considered individually and per se. Transactions forming part of a circular supply chain in which a trader misappropriates the amounts paid to it as VAT instead of accounting for those amounts to the tax authorities do not on that account cease to constitute an economic activity within the meaning of Article 4(2) of the Sixth Directive.