Customs wins £13m VAT carousel case

Computer components dealer mulls appeal

HM Customs and Excise has won an important tribunal victory in a £13 million case involving computer components and disputed claims of tax fraud.

The complex case revolved around whether business transactions entered into by Bond House Systems, a large computer component wholesaler, amounted to economic activity or an attempt to find loopholes in the tax system.

Customs argued that as the goods involved were repeatedly traded within a group of companies, without being sold to an end user, there was no true economic purpose to the transactions.

The transactions formed part of a carousel, or Missing Trader Intra Community (MTIC) fraud, Customs believe.

The Customs case is that Bond House Systems was an unwitting participant in fraudulent activity. There's no suggestion that Bond House Systems' conduct was itself criminal.

This case arose as a result of a VAT audit of Bond House Systems repayment claims for May 2002. Around £13m in VAT payments is in dispute in the case, a director at Bond House Systems told us.

After visiting the company and examining its books, Customs decided to disallow the majority of the May 2002 repayment claim based on "transactions not amounting to economic activity". These transactions in question fell outside the scope of VAT, Customs ruled.

Bond House Systems sought leave to obtain a judicial review. In October 2002, the High Court turned down this request, referring the dispute to the VAT and Duties Tribunal, which heard the case in January.

Yesterday, Tribunal chairman Colin Bishopp issued a ruling that supported Customs' interpretations of the law and found in its favour on 26 of the 27 evidential points considered in the case. The Tribunal also awarded Customs legal costs.

A director at Bond House, who asked not to be named, told us the company is in talks with its legal team about mounting an appeal.

Customs said this was an "important decision and has major implications for trade sectors affected by MTIC fraud".

In a statement, Customs said: "The decision confirms Customs' entitlement to deny repayment claims where the transactions do not amount to economic activity. The tribunal agreed that Customs was right to disallow the majority of a repayment claim where a chain of transactions had occurred which did not involve taxable supplies.

"This is a useful precedent for any future cases and in particular in cases involving computer chips and mobile telephones."

Missing Trader Intra-Community (MTIC) VAT fraud cost the UK taxpayer somewhere between £1.7 and £2.75 billion in the 2001/02 financial year, according to Customs estimates.

Clamping down on missing trader fraud is Customs' top VAT fraud priority. To tackle this type of fraud, Customs have assigned 340 staff with the goal of reducing missing trader fraud losses by at least £750 million by the end of 2003-04. ®

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