Stop the Carousel

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Where do you stand if there is VAT fraud – perhaps several links away – in your supply chain? Until a ruling by the European Court of Justice just two or three weeks ago it could have cost you very dearly.

Carousel fraud, or Missing Trader Intra- Community VAT fraud to give it its proper title, has been a considerable concern to tax authorities across Europe in recent years, costing the UK government an estimated €2.8bn in the year 2004-05.

The scam works on the basis that fraudsters obtain VAT registration to acquire goods – normally, mobile phones and high-value electronics components – VAT free from one member state. They then sell on the goods at VAT inclusive prices to a VAT registered trader in the same state as themselves, charging the VAT on the deal. The defrauding organisation then disappears, having provided the innocent recipient of the goods with a VAT invoice. The company holding the goods then claims the VAT back from the authorities as normal. The result is, the taxpayer if left with a hefty bill.

Somewhat miffed with this situation, Revenue & Customs started to withold refunds from traders on the premise that where there was a ‘missing trader’ anywhere in the supply chain, there was no economic activity. This created serious problems for quite a number of legitimate trading companies – in one instance leaving a €23m hole in the company’s finances.

Unsurprisingly, leagal processes were put in place to contest this punitive procedure which resulted in a long-awaited final ruling by the European Court of Justice in mid January. The outcome was that companies unwittingly involved in a chain of transactions where carousel fraud occurred at some point, should still have the right to reclaim the VAT.

So, what happens now? Well, for sure there will be a number of companies pressing for repayment of witheld VAT refunds, along with interest – a cost that could run into hundreds of millions of euros. But, the problem of Carousel fraud has not gone away. It is believed that it has undergone a resurgence in recent months, taking the form of a more sophisticated trail across such countries as Switzerland and Hong Kong to throw inspectors off the track.

The answer to the problem may well lie in an initiative put forward by the current holder of the EU presidency, Austria. VAT should only be levied when a product reaches the consumer and not when it passes from trader to trader. Surely this is the solution we have all been looking for.

Nick Allen, Editor

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