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VAT Voice by Steve Allen

Steve Allen, Director of VAT Solutions (UK) Ltd, explains that innocent businesses unwittingly caught up in carousel fraud can take comfort from a recent European Court decision.

Missing traders

During the last couple of years, Customs have been on a relentless crusade against Missing Trader fraud (a.k.a. ‘Carousel’ fraud), most notably in the mobile phone and computer chip sectors. Armed with a raft of new powers, they have wreaked havoc, forcing innocent businesses into financial hardship or even ruin. Ironically, this overzealous approach could now prove to be their undoing.

Innocent businesses

In a simplistic summary of Customs’ attack on three unconnected companies (i.e. Optigen Ltd, Bond House Systems Ltd, and Fulcrum Electronics Ltd (in liquidation)), Customs decided that they would disallow the input tax claimed by legitimate traders involved in a transaction chain where one or more of the other traders were fraudulent. Therefore, if an innocent business got caught up in a trading chain, the purpose of which was to undertake a VAT fraud, nothing in that chain was an economic activity and they could not claim the VAT back, because it wasn’t VAT. Not surprisingly, this has been appealed to the European Court.

Transactions in the chain

In a recent decision, the Advocate-General considered all three cases together as joined referrals (ECJ refs. C-354/03, C-355/03 and C-484/03 respectively), and unequivocally disagreed with the analysis of Customs and the Tribunals. The AG has ruled that each transaction in the chain has to be assessed individually for VAT purposes and its VAT treatment cannot be coloured by external factors, such as the intention of any other trader in the chain.

The AG resoundingly found against Customs on all five points referred to him. At present, this is only the AG’s opinion, and has to be ratified by the full ECJ, expected in June 2005. In view of strength of the opinion, it seems likely that the ECJ will follow it. In the meantime, Customs have issued a statement saying that they will not change their policy until the ECJ decision is released.

VAT refunds?

This will affect many businesses that have had large sums of input VAT disallowed, as there is now a clear light at the end of the tunnel for these businesses to get their money back. In addition, many businesses have been forced into bankruptcy or suffered financial hardship as a result of Customs’ actions, so they will shortly have the opportunity to sue Customs for compensation.

March 2005

Steve Allen
Director, VAT Solutions (UK) Ltd
Email: steveallen@vatsolutions-uk.com

VAT Solutions (UK) Ltd
11 Winmarleigh Street,
Warrington,
WA1 1NB

(T) 01925 242497
(F) 01925 242498
(M) 07810 433927
(W) www.vatsolutions-uk.com

VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via the following address: www.vatsolutions-uk.com/newsletter.doc