ECJ Deals Blow To UK Taxman In 'Missing Trader' VAT Case

by Ulrika Lomas, Tax-News.com, Brussels

13 January 2006

The European Court of Justice has struck another blow at the tax raising abilities of the UK government by ruling that innocent companies caught in a 'missing trader' value added tax fraud chain cannot be held liable for unpaid tax.

The three companies involved in the case, Optigen Ltd, Fulcrum Electronics Ltd and Bond House Systems Ltd, were exporters of computer chips who unwittingly became party to missing trader fraud.

In 2002, their claims for repayment of GBP201 million in VAT were rejected by the UK Commissioners of Customs & Excise, who took the view that the sales and purchases made by the companies were devoid of economic substance and did not constitute 'supplies made in the course of an economic activity' for the purposes of VAT.

An appeal by the companies was referred by the High Court to the ECJ which, in a decision announced on Thursday, rejected the UK tax authority's augments.

According to the ECJ, in a supply chain, "each transaction must be considered on its merits as a separate economic activity."

"The right of a taxable person to deduct VAT cannot be affected by the fact that, without that person knowing or having any means of knowing, another transaction in the chain is vitiated by fraud," the judges stated.

Missing trader fraud, also known as 'carousel fraud', involves the importation of goods (such as mobile phones and computer components) free of value-added tax. The goods are then sold on with VAT added, following which the perpetrators disappear, without having paid the necessary tax to the government.

It has been estimated that the UK Treasury lost up to GBP1.9 billion in VAT revenues in 2004/5 as a result of carousel fraud.

The European Court has ruled against governments in a number of recent tax cases such as Marks & Spencer's recent victory against UK provisions on group tax relief. This has led to many politicians to accuse the ECJ of eroding national revenue bases and rewriting Europe's tax laws through the back door.

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