Let’s set the scene. Your business has acquired a new supplier and has been buying mobile phones, or computer chips (CPUs), or any other low-value, high-volume goods that are in current demand. The prices you are paying seem unbelievably low. This has gone on for the last few months without problems; the delivery is always on time, a proper VAT invoice accompanies the goods and the payments go through smoothly. As your confidence in this new supplier grows the deals become more regular and increase in value.

You submit your quarterly VAT return, to reclaim all of the input VAT on your purchases and balance the books. HM Customs and Excise inform you that your “new customer” has been declared a “missing trader”; i.e. has disappeared without accounting for the VAT that you have paid him on all of his recent transactions. Guess who HM Customs and Excise are going to turn to for the missing VAT? That’s right, you. Your VAT refund for the last quarter will be blocked and HM Customs and Excise will issue you with an assessment for the missing VAT. Welcome to the world of VAT carousel fraud.

The secret to “missing trader” fraud is that the criminals need to get their hands on the goods VAT-free – it’s the VAT element of the transaction that they fail to account for. The fraud has been made easier by the prospect of the free movement of goods within the European Union (EU). Currently, if you are a UK VAT-registered traders and you wish to purchase a consignment of goods from, for example, a supplier in Germany, then provided he is a proper VAT-registered trader he can supply you the goods free of VAT or zero-rated. The UK trader then acquires the goods and accounts for them in his records as an acquisition before he sells them on in the normal course of business.

The fraudster imports the phones or CPUs and acquires them VAT-free, he then sells them onto you and you pay the purchase price plus the VAT.

The fraudster pockets the VAT and, after a suitable period, usually before returns or assessments are issued, disappears with 17.5% of all his recent transactions.

How to Protect Yourself

So what can you do to protect yourself from becoming a victim of carousel fraud? (It is called carousel fraud because the goods often go around and around, just like a children’s fairground ride). The very minimum that you should be doing is to ask for copies of the VAT registration certificate and then verifying it with HM Customs and Excise. Nunn Hayward can check with Companies House that the company is registered, check that the company actually exists and run credit checks if requested. You should consider the methods of payments; are they asking to make partial payments to one company and the balance to a third party’s account? For some this may be considered normal business practice, but what if the account is an offshore one? Would you know that just by looking at a series of sort codes and account numbers? You should also consider the actual cost of what is being supplied, does it sound right? If the commodity is really cheap then it could be stolen, or caught up in “missing trader” fraud. In these circumstances, the VAT that you are paying on any series of transactions is at risk. If the deal sounds too good to be true, it usually is!

Should you wish to discuss any issues of this in more detail, please contact Stephen Cook, Tax Partner, or your usual contact.

Readers may have seen in the press details of an historic victory by Marks & Spencer over Customs before the European Courts.

The issue at stake was whether having convinced Customs that Marks & Spencer were correct in their treatment of VAT on “Tea Cakes,” they could recover the VAT paid in error back from Customs in the past.

In 1996, Customs arbitrarily introduced National legislation to limit refund claims to three years.

Marks & Spencer have won the ability to go back if they so wish to 1973 when VAT was first introduced based on the decision won in the Courts. Reportedly, the VAT plus interest could be in excess of £12 million.

If you are still with us, you may well be asking the question “So what’s all this got to do with us in the real world?”

The answer is simple, over recent years Customs have taken two courses of action: -

• Firstly, they have targeted particular professions/industries to squeeze them for VAT they perceive that is not being accounted for. Very often these negotiations end up appearing in the Courts and take many years. In the meantime, businesses have to decide whether to take the risk of not complying with Customs view and incurring penalties, interest etc if their representative bodies loose at the end of the day or paying the monies over for a quiet life.
  
  
• As mentioned above, in 1996, Customs imposed in UK National legislation a time limit beyond which refund claims could not be reclaimed.

The net result has been that where a particular professions/industries representative bodies have been successful in arguing their case before Customs, a significant number of businesses have been unable to reclaim all the VAT they have as it transpired paid in error due to the three year cap.

One pundit on the BBC commented that this decision … “will open to flood gates for similar cases where Customs has refused to pay money to which they were never entitled to in the first place”.

The range of businesses that could benefit is very wide and can be limited to specific decisions by reference to one particular business or by reference to the overall treatment for an entire trade. Whilst not exhaustive, the most significant decisions made in recent years include: -

1) Financial Services firms
2) Retailers
3) Motor Dealers
4) Opticians
5) Universities and Local Authorities

If any readers have had decisions/discussions with Customs in the above circumstances, then action needs to be taken as soon as possible. Customs do not like losing and it is likely that if they can, they will implement a different form of legislation blocking the ability for businesses to reclaim.

One cautionary word is that the above decision does not apply where a business has overpaid merely as a result of a taxpayer error.

Please contact your usual Engagement Partner or Stephen Cook, one of our Tax Partners for further advice if the above is of relevance to you.