UK suffers blow in fight against high-tech tax fraud

The European Court of Justice has thrown out UK efforts to stop companies claiming VAT rebates on goods that had been used in fraud scams

The European Court of Justice has dealt a significant blow to the UK's effort to clamp down on VAT "carousel" fraudsters by ruling that three companies — including two involved in the re-sale of computer processors — are entitled to full reimbursement of their VAT.

The two electronics companies, Optigen and Fulcrum Electronics, along with Bond House Systems which has since gone into liquidation, had been fighting a decision by the UK's VAT and Duties Tribunal. It had ruled that they could not claim a VAT refund on high-tech equipment they sold which may have previously been used in a VAT carousel fraud.

So-called "carousel" fraud is a serious issue in the UK where VAT officials believe that companies are cheating the tax authorities of millions of pounds. The fraud happens when goods are continuously imported and exported to and from the UK, incurring VAT payments at every stage which are pocketed by the fraudsters.

According to their lawyers, Peters and Peters, Optigen and Fulcrum "were legitimate traders involved in the export of computer chips" prior to the action by the tax authorities. They, along with Bond House, say they were unwittingly caught up in the carousel fraud after buying chips from other companies.

Because VAT had already been unlawfully claimed back on these chips, the UK authorities refused to allow the three firms to claim a VAT rebate, as companies would normally be allowed to do.

"We have been forced to cease trading after the withdrawal of a VAT refund of £13.2m. We had to make 20 people redundant, myself and the other business directors and their families have suffered terribly as a result of the Customs' actions," said Bond House Systems partner Ian Prescott, according to The Guardian.

Electronic components, such as top-end CPUs, are particularly suitable for carousel fraud as they have high value while being small and light enough to be cheap to transport.

While many of the VAT fraudsters have already been caught as part of a crackdown, the UK tax authorities had applied to Brussels to get a ruling that it would be able to recoup the VAT which had been left unpaid by UK businesses.

But the European Court of Justice rejected this, ruling that "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."