Supplies that are illegal

By Tolley

The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Supplies that are illegal
  • Background
  • Specific transactions

This guidance note provides an overview of the VAT treatment of supplies that are illegal.


Firstly it is important to note that making illegal supplies is not automatically outside the scope of VAT. This concept was clarified in the CJEU case Oliver.

VATA 1994, ss 4-5Customs and Excise Commissioners v Oliver [1980] STC 73 (subscription sensitive)De Voil V3.102A (subscription sensitive)

In this case a second-hand car dealer sold a number of stolen cars at auction. The trader did not account for VAT on the sales, and HMRC issued an assessment to recover output tax on the amounts received. The business appealed, contending that there had been no supply since it did not legally own the cars. The Court rejected this contention and upheld the assessment. The fact that the business had no legal title to the cars did not alter the fact that it had supplied them from a VAT perspective.

Griffiths J defined supply as:

“the passing of possession in goods pursuant to an agreement where under the supplier agrees to part and the recipient agrees to take possession”

This was further clarified in the Witzemann case.

The CJEU has stated that such supplies will only fall outside the scope of VAT if the concept of fiscal neutrality is not compromised and the leading case is Witzemann. The CJEU ruled that in finding that the supply of counterfeit money fell outside the scope of Article 2(1) of the Sixth VAT Directive (now Article 2(1) of the Principal VAT Directive 2006/112/EC ) the Advocate General stated:

Witzemann v Hauptzollamt [1993] STC 108 (subscription sensitive)
“Illegality manifests itself in many forms and there are many products that either cannot be lawfully traded or trade which is subject to certain restrictions: drugs, counterfeit money, weapons, pornography, the pelts of certain animals, stolen goods and so forth. Not every transaction tainted with illegality will be exempt from taxation. A line must be drawn between, on the one hand, transactions that lie so clearly outside the sphere of legitimate economic activity that, instead

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