A sham transaction

The taxpayer was a German car dealer selling cars for company A. The taxpayer could only obtain a commission from A for cars sold in Germany but had contracted to sell some cars to a Belgian company. It therefore transacted to nominally sell the cars to another German company S and issued invoices including VAT. S claimed this as input tax in the quarter ended September 1994. After an investigation the German authorities refused the deduction on the grounds that the transaction was a sham.

The taxpayer then advised S that the previous invoices were redundant and amended its records to show the transaction as a VAT-free intra-community supply and claimed exemption.The tax authority refused the claim to exemption on the basis that accounts had not been kept regularly and immediately updated. The authority sought a ruling from the European Court of Justice as to...