The ruling concerns 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.
The scam reportedly costs the UK over £1 billion per year.
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.
Today, the European Court of Justice ruled that such firms are
carrying out an economic activity, and as such are entitled to a
VAT rebate worth, in Bond House’s case alone, £13.2 million.
The ruling follows the approach taken in an advisory Opinion to
the Court by Advocate General Poiares Maduro in February last
year.
The Court stressed that the Sixth VAT Directive assigns a very
wide scope to VAT and to the key terms ‘taxable person’, ‘supply of
goods’ and ‘economic activities’, reiterating that these terms are
objective in nature and apply without regard to the purpose or
result of the transactions concerned.
According to the Court, it would be contrary to EU law for tax
authorities to take account of the intention of a trader, other
than the taxable person concerned, involved in the same chain of
supply, and/or the possible fraudulent nature of another
transaction in the chain, of which that taxable person had no
knowledge and had no means of knowledge.
In such a chain, each transaction must be regarded on its merits
and the character of a particular transaction in the chain cannot
be altered by earlier or subsequent events.
It follows, said the Court, “that transactions such as those at
issue in the main proceedings, which are not themselves vitiated by
VAT fraud, constitute supplies of goods or services effected by a
taxable person acting as such and an economic activity.”
“The right to deduct input VAT of a taxable person who carries
out such transactions cannot be affected by the fact that in the
chain of supply of which those transactions form part another prior
or subsequent transaction is vitiated by VAT fraud, without that
taxable person knowing or having any means of knowing,” it
added.
David Sweeting, Head of VAT Consultancy at accountancy firm
Bentley Jennison, which acts for Bond House Systems, welcomed the
ruling.
“This landmark decision will affect hundreds of businesses
across the UK, as well as all those overseas companies that have
traded with the UK and suffered the effects of this unjust law,” he
said. “The decision gives industry more confidence in the judicial
system because a sweeping injustice on a massive scale has been
righted.”
