UK Customs Criticised By European Advocate General In VAT Claim Case

by Robert Lee, Tax-News.com, London

18 February 2005

The UK Government may be forced to repay more than £200m in value added tax that it withheld from three information technology firms which were inadvertently caught up in a tax fraud.

The news emerged earlier this week after a European Advocate General at the European Court of Justice, Luis Maduro, criticised Customs for pursuing the innocent companies, which included Bonds House Systems, Optigen and Fulcrum Electronics, rather than the perpetrators of the carousel fraud.

At present, EU-based firms that have registered for VAT can exchange goods free of duty. However, carousel fraud, also known as ‘missing trader’ fraud, arises when goods are sold on at VAT-inclusive prices, following which the fraudster disappears without paying the VAT back to the government.

"The UK seems to envisage combating carousel fraud - or at least dispensing with the problems it poses - by limiting the scope of the VAT system. To my mind, the court should not consent to this approach," the advocate-general’s opinion stated.

"It would drastically shift the burden of the problem from the tax authorities to the private sector at the expense of legitimate trade and the proper functioning of the VAT system," Maduro added.

A decision on the case is expected by the ECJ later in the year, although in the vast majority of cases, the court tends to follow the opinion of advocates general.

Meanwhile, according to a report in the Financial Times, London-based lawyers are said to be exploring the possibility of putting together a class-action lawsuit that would attempt to claim damage on behalf of legitimate traders who have suffered as a result of delays in VAT repayments.

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