European court backs Revenue approach to VAT fraud

The government yesterday won a significant victory in its fight against VAT fraud, which is costing the taxpayer billions of pounds, when the European court of justice backed one of Revenue & Customs' key weapons against so-called "carousel fraud". The ECJ confirmed an earlier judgment that traders involved in a chain of trades involving goods such as mobile phones could be liable to pay the VAT on the goods if they knew or had grounds to suspect that another trader in the chain intended to avoid paying the tax.

"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," said the ECJ.

Carousel fraud occurs when goods are imported free of tax, passed along a chain with the VAT added and then exported. Some traders in the chain disappear without handing the VAT to Revenue & Customs while others reclaim it at the point of export before re-importing the goods again to travel round the chain again.

Figures released this week showed the amount of carousel fraud had jumped by 50% in the first quarter of the year and has swelled by over 500% in the past 12 months. The tax losses are rising rapidly and may be more than £5bn this year. Revenue & Customs says this is now its number one problem and it has 500 investigators on the case.

"The government welcomes the ECJ's firm and final confirmation that member states may legally prevent abuse of the VAT system and protect revenues by applying joint and several liability," said a Revenue spokesman. "Traders that do not take reasonable precautions are at risk of being liable for unpaid VAT."

A group of 53 traders in mobile phones and computer processing units and their trade body, the Federation of Technological Industries (FTI), complained about the Revenue's application of the joint and several liability rules and a British court had sought judgment from the ECJ.

FTI chairman Anthony Elliot-Square said the judgment was fair as it ensured that the burden of proof on traders to show they were not defrauding the government would not be excessive. "There was a presumption of guilt before being proven innocent. There is now a sensible approach, saying they do have the powers but they have to use the powers reasonably and sensibly."