Scores Of UK Companies Set To Use JLO To Reclaim VAT From HMRC

by Robert Lee, Tax-News.com, London

11 May 2006

A preliminary ruling in a UK court could pave the way for a substantial joint litigation order (JLO) involving as many as 150 companies, who are seeking compensation from HM Revenue and Customs for withholding VAT reclaims despite having been innocently caught up in a 'carousel' value added tax fraud, according to a report in The Guardian.

If the preliminary ruling made in the High Court last week is approved by Sir Igor Judge, president of the court's Queen's bench division, then law firm DLA Piper could launch an action on behalf of scores of companies seeking compensation from HMRC, which, National Audit figures show, has withheld GBP1.25 billion in VAT reclaims to companies caught up in a carousel fraud.

"This is the opening shot of what may become a very substantial litigation," DLA Piper's senior partner Simon Airey was quoted as saying in the report.

Carousel fraud has been one of the fastest growing, and most serious of fiscal crimes in terms of revenue loss in recent years. Also known as missing trader intra-community fraud (MTIC), it 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 17.5% VAT added, following which the firms disappear, having pocketed the difference. In many cases, the goods are passed along a long chain of traders making the fraud hard to detect and the perpetrators difficult to apprehend.

It is thought that the problem is now so rife that it contributed to a shock fall in UK VAT revenues in March - the first time that VAT revenues have fallen since the introduction of the levy in 1973.

In January the United Kingdom made an application to the European Commission to be able to deal with VAT on certain goods in a new way, in a bid to cut down on the fraud. This would enable the UK to introduce a reverse charge procedure for transactions between VAT registered businesses in certain goods.

The application to the EC came after HM Revenue & Customs lost a key case in the European Court of Justice following its refusal to pay VAT reclaims to innocent companies in the chain of a carousel fraud.

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 argument that the ECJ rejected in a decision released in January.

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.

The government has estimated that the annual revenue loss to carousel fraud is somewhere between GBP1.1 billion to GBP1.9 billion.

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