ECJ Allows UK To Collect Unpaid VAT Liabilities From Innocent Firms

by Robert Lee, Tax-News.com, London

16 May 2006

The European Court of Justice has boosted the efforts of the United Kingdom's government to crack down on carousel fraud, by allowing HM Revenue and Customs to pursue innocent traders for unpaid value added tax in certain circumstances.

In a ruling handed down on Friday, the ECJ stated that HMRC can hold traders who are caught up in the fraud liable for VAT losses anywhere in the chain of transactions, as long as the traders had reasonable grounds for knowing about the fraud.

"A taxable person, to whom a supply of goods and services has been made and who knew, or had reasonable grounds to suspect, that some or all of the VAT payable in respect of that supply, or any previous or subsequent supply, would go unpaid, may be made jointly and severally liable, with the person who is liable, for the payment of that tax," the ECJ stated.

Carousel fraud, also known as missing trader intra-community fraud (MTIC), involves the importation of goods (typically high value small electronic goods such as mobile phones and computer components) free of value-added tax. The goods are then sold on by companies with the 17.5% VAT added, following which the firms disappear, having pocketed the difference. The fraudulent goods may then be passed along a long chain of innocent suppliers.

Commenting on the judgment, Anthony Elliot-Square, the chairman of the Federation of Technological Industries (FTI), which brought the case along with 53 other traders, praised the ECJ's "sensible approach" to the problem.

“There was a presumption of guilt before being proven innocent," he observed. However, he added that while the government has been given licence by the ECJ to prosecute companies, they must use the powers "reasonably and sensibly".

A previous ECJ judgment last December blocked the UK tax authorities' attempt to hold innocent firms liable for unpaid VAT.

Recent government data has suggested that carousel fraud is much more prevalent than previously thought, and the annual revenue loss is thought to be double that of the government's own worst case estimate, at between GBP5 and GBP6 billion.

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