Traders await major VAT fraud ruling

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A new case between four traders and HM Revenue and Customs (HMRC) is expected to provide clarity on VAT fraud law in the UK, and make clearer the position of 600 traders with  between £4 billion and £8 billion of input tax witheld by the UK Treasury.

The claims of four mobile phone and computer chip traders against HMRC will be heard in a conjoined case worth £26.6 million of witheld VAT over five days in the Court of Appeal.

The claims of traders Calltel and Opto Telelinks were heard in joint cases previously in the VAT and Duties Tribunal and the High Court, and were dismissed in both sessions.

The pair have appealed the decisions, and been combined also with trader Mobilx, which failed in the VAT and Duties Tribunal, and trader Blue Sphere Global (BSG), which won its High Court ruling; a decision now appealed by HMRC.

HMRC’s policy to stamp out missing trader intra-community (MTIC) carousel fraud presently hinges on its ‘means of knowledge’ test, which has seen it withold VAT repayments from mobile phone and computer chip traders indefinitely as it acertains whether they have run proper due diligence on their supply chains.

The ruling in the Axel Kittel case said traders should not have VAT witheld provided they have taken “every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud”.

HMRC’s subsequent ‘means of knowledge’ test has seen VAT witheld from traders for an extended period, without any legislative interpretation in place.

Dass Solicitors partner Alias Dass said: “The law has been uncertain until now because Tribunals do not bind each other, so each Tribunal to date has used different interpretations of the law which was established during the Kittle case. Both HMRC and traders require clarification.”

LHS Solicitor Daniel Berke said: “Traders are expected to find out what due diligence measures are required of them. The case will hopefully provide this clarity. Honest traders are exposed at the moment. If they are unaware that one person in the chain hasn’t paid VAT, the honest trader is getting penalised and not getting VAT repaid.

“The impact of the case is far reaching for traders and will set a standard for other traders to follow in the future.”

In the 2008 Livewire case in the Court of Appeal, won by the trader, Justice Lewison called for clearer guidelines.

He said: “In my judgment in a case of alleged contra-trading, where the taxable person claiming repayment of input tax is not himself a dishonest co-conspirator, there are two potential frauds – the dishonest failure to account for VAT by the defaulter or missing trader in the dirty chain and the dishonest cover-up of that fraud by the contra-trader.”

HMRC has said its policy has had a significant impact upon levels of MTIC fraud involving UK traders, and that its multi-pronged attack has seen annual Government losses reduced by up to £2 billion.

Most significantly, HMRC’s introduction of a reverse charge mechanism in 2007, which removed all VAT requirements from the supply chain and obliged the end-customer to pay VAT at the point of sale, has opened up trade again, and reduced the number of cases into court.

Full article in Mobile News issue 457 (February 15, 2010).

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