Viewpoint: the Bond House verdict

Today’s ECJ verdict means HMRC needs to cough up £40m in VAT refunds to the
three companies in the Bond House case, but what does it mean in a wider
context?

Bond House Systems Limited, Fulcrum Electronics Ltd and Optigen Ltd are just
the tip of the iceberg. Many other trading companies have suffered withholding
of their VAT refunds for many months, if not years. There’s no doubt that these
will now come forward with claims for this withheld VAT, for interest and even
for damages as some companies have found that their cash flow could not tolerate
the strain of the VAT refunds being withheld.

There are three key questions: How much will the Treasury have to repay? How
will it try to avoid this likely cash haemorrhage? What will the government and
HMRC do about the very real problem of carousel or ‘Missing Trader’ fraud?

As to how much – well there are no precise numbers but given that there is
£40m on the table in the Bond House case and trawling through VAT tribunal
decisions reveals another £15m to £20m (often relating only to a few month’s
trading) so it’s a lot. Around £300m is probably a fair estimate. We have heard
that the Treasury has set aside £200m to cover repayments and are looking at
potentially a further £100m.

How the Treasury might seek to mitigate its refunds is slightly murkier. In
slightly convoluted double negative language, today’s ECJ judgement effectively
introduces a test such that cases are subject to a test that if there was a
fraud occurring somewhere in a chain of transactions, a trader can be entitled
to a refund of withheld VAT provided that this VAT fraud was happening ‘without
that taxable person knowing or having any means of knowing’.

We fully expect HMRC to apply this test vigorously and claimants should be
prepared to demonstrate a very high level of due diligence. Indeed, today Dawn
Primarolo has said that ‘the UK notes the Court’s decision and will of course
follow the guidance it has given’ but goes on to say that HMRC will ‘now
consider the detail of the ruling in order to determine the extent to which it
applies to their previous decisions’.

On the question of what the government and HMRC will do about carousel or
Missing Trader fraud, one thing we can be sure of is that they are totally
committed to clamping down on this type of fraud – and rightly so.

Dawn Primarolo described missing trader fraud as costing the UK over £1bn in
2004-05 and said that HMRC and the government will ‘continue to take further
measures as appropriate, in order to protect the revenues needed to provide
essential public services’.