Tax advisers who have complained that HM Revenue & Customs has placed more and more of the responsibility on business for vetting the credibility of their clients received a timely fillip last week following a key ruling from the European Court of Justice.

The case, led by a mobile phone trader called Teleos and 13 other companies, challenged a decision by HMRC to deny Teleos a VAT reclaim after it emerged that
goods the company exported from the UK had not arrived at their final destination.

The ECJ judgment went in favour of Teleos, as the court decided that it alone should not be burdened with all the due diligence responsibility on its clients, and that it
had done enough to show steps had been taken to ensure that the goods it sold had been delivered as planned.

The ruling means that HMRC can no longer apply the letter of the law when denying VAT reclaims and places an obligation on the taxman to be reasonable when a company can show it has taken measures to check its customers and the delivery of goods it sells.

Teleos had dispatched goods to a client in Spain, allocated a zero rate of VAT on the merchandise and then proceeded to claim back the VAT it had paid for the goods
from the taxman.

The company had an official government document confirming delivery of the goods, but HMRC found that the form was false and immediately denied Teleos its reclaim.

The ECJ, however, said this was not fair on Teleos, as it had taken steps to verify the validity of its VAT reclaim.

The judgment said: ‘The objective of preventing tax evasion sometimes justifies stringent requirements as regards suppliers’ obligations. But any sharing of the risk between the supplier and the tax authorities, following fraud committed by a third party, must be compatible with the principle of proportionality.’

Chiltern VAT investigations director John O’Donnell said: ‘What this case does do is require HMRC to go beyond the technical requirements of the law.

‘If it accepts that a supplier is innocent then it shouldn’t be able to deny a VAT reclaim.’