Opinions given by Advocates General are highly influential and
are usually followed by the Court.
The opinion concerned the joint cases of UK firms Bond House
Systems Ltd, Optigen Limited and Fulcrum Electronics Ltd (in
liquidation) – all three of which had innocently found themselves
in the middle of a Missing Trader Intra-Community (MTIC) VAT
fraud.
MTIC VAT fraud, also known as carousel fraud, occurs where
fraudsters obtain VAT registration to acquire goods such as chips
and mobile phones VAT-free from other Member States. They then sell
on the goods at VAT inclusive prices and disappear without paying
over the VAT paid by their customers to the tax authorities.
Recently, authorities have taken action against the fraud by
considering all the transactions in a chain of supply involving a
missing trader or a hijacked VAT number and refusing to repay VAT
to any company involved in that chain of supply.
According to Customs, when considered as a whole, the
transactions, even involving innocent parties, are a non-economic
activity for VAT purposes and no rebates are necessary.
This approach was upheld by VAT and Duties Tribunals in cases
brought by Bond House Systems Ltd, Optigen Limited and Fulcrum
Electronics Ltd. All three firms appealed to the High Court, which
subsequently made a combined referral to the European Court of
Justice on the question of whether the three companies were
carrying out an economic activity when they unwittingly became
involved in the fraud.
Issuing his opinion last week, Advocate General Maduro, found
that each transaction in the supply chain must be considered on its
own merits. "Consequently," he said, "the character of a particular
transaction in the chain cannot be altered by earlier or subsequent
events."
It is therefore not necessary to look at the underlying purpose
of the transactions – in this case to commit fraud. Any other
approach, said Maduro, would be hard to reconcile with the relevant
EU VAT Directive, and give rise to considerable legal
uncertainty.
"The United Kingdom seems to envisage combating carousel fraud –
or at least dispensing with the problems it poses – by limiting the
scope of the VAT system," said the Advocate General. "To my mind,
the Court should not consent to this approach. It would drastically
shift the burden of the problem from the tax authorities to the
private sector, at the expense of legitimate trade and the proper
functioning of the VAT system. Moreover, it would deter Member
States from taking appropriate measures against carousel
fraud."
Don Mavin, Director of the VAT Investigations Team at tax
specialists Chiltern plc said: "Snr. Maduro has given Customs an
extremely strong hint that the way to tackle carousel fraud is to
go after the actual fraudsters – and not simply their innocent
victims."
He described the decision as "excellent news for many businesses
who have been inadvertently caught up in this overly aggressive
campaign by Customs."
But Chiltern also warned that since Customs has stated it will
continue to issue VAT assessments where the 'non economic activity'
principle has been established until the European Court of Justice
rules otherwise, companies need to ensure they have satisfactory
due diligence procedures in place to verify their suppliers and
customers in order to minimise the risks of a VAT liability arising
from trading in these markets.
