The European Court of Justice (ECJ) has ruled today that taxpayers cannot be held liable for VAT fraud if they didn’t know and had no reason to know fraud had been committed. HM Revenue & Customs (HMRC) withheld input tax repayments to traders (namely Bond House Systems Ltd, Optigen Limited and Fulcrum Electronics Ltd), who bought goods which had earlier been used in a carousel fraud*.

The ECJ has ruled that the supply of the goods to these traders was a valid VAT transaction irrespective of any fraud higher in the supply chain. In particular, the ECJ ruled that fraud higher or lower in the supply chain is irrelevant as long as the taxable person requiring repayment of input tax "had no knowledge and no means of knowledge" of the fraud.

Dennis Knowles, indirect tax partner at Deloitte says: “Although in this case it  seems that the tax payers have won (as the UK courts accepted that they had no knowledge or means of knowledge of the fraud), the Court’s use of the words “means of knowledge” may open the possibility for HMRC to withhold VAT in future cases. This might be on the grounds that although the innocent trader might not know of the fraud, he might have the means to know because he should be on the alert due to the unusual nature of the transaction. Typically in carousel fraud the transactions are high in volume, with a quick turnover and low purchase price - a transaction which is too good to be true.”

Ends

Notes to editor
*Carousel fraud relates to a scenario where at some point along the supply chain there has been a fraudulent dealer who has sold goods and charged VAT, but before the VAT is paid to Customs, the trader disappears and the tax is never collected. Historically the goods used in this type of fraud were high value technical items that were small in size, e.g. mobile phones and computer chips, but the fraud has now mutated to encompass women’s fashion ware and basic consumer products sold in supermarkets.

On the 5th December last year, Deloitte, together with the other ‘Big 4’ accountancy firms, issued a statement endorsing the campaign by HM Revenue and Customs (HMRC) against missing trader intra-community fraud (carousel fraud).

About Deloitte
In this press release references to Deloitte are references to Deloitte & Touche LLP which is among the country’s leading professional services firms, providing audit, tax, consulting and corporate finance services through more than 9,000 people in 21 locations. Known as an employer of choice for innovative human resources programmes, it is dedicated to helping its clients and its people excel. Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein whose member firms are separate and independent legal entities.  Neither DTT nor any of its member firms has any liability for each other’s acts or omissions.  Services are provided by member firms or their subsidiaries and not by DTT. Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority. The information contained in this press release is correct at the time of going to press.