The policy of HM Revenue and Customs (HMRC) of withholding VAT refunds for up to two years while carrying out anti-fraud enquiries has been put under pressure by a new European Court judgment that tax offices should not withhold refunds for more than two months for an established trader.
The European Court of Justice was upholding a case brought by a Polish trader who had his VAT claim withheld pending extended verification without a decision being made.
The case was referred from the Polish court to the European Court of Justice. It decided that 180 days was a reasonable amount of time for the authorities to carry out enquiries into a newly-registered trader, reducing to 60 days in the case of an established trader.
The ECJ also said it was not appropriate for the Polish authorities to insist on a security deposit being lodged.
The Judgment of the Court sets a precedent for UK traders to challenge extended verification periods of up to two years imposed in the UK by HMRC.
The Court agreed member states had a legitimate interest in preventing tax evasion and abuse.
But it said such measures "must be in accordance with the principle of proportionality" and "employ means which, whilst enabling them to effectively to attain such an objective, are the least detrimental to the objectives and principles laid down by the relevant Community legislation, which include the fundamental principle of the right to deduct VAT".