Traders win first round in EU carousel fraud battle

Tens of millions of pounds worth of public funds have been put at risk on the latest roll of the dice in a ‘carousel fraud’ battle between computer component businesses, mobile phone traders and Customs & Excise.

A group of companies, boosted by a preliminary European Court of Justice decision announced last week, is now preparing to launch a group action to reclaim VAT from the government.

Some of the individual claims reach eight figures, without taking into account interest accrued. In terms of overall cost, the Treasury could face a bill for hundreds of millions.

Last Wednesday, an ECJ advocate general ruled that Customs was wrong not to refund VAT on the purchase of computer components to companies trading in the lucrative physical commodities market.

Simon Airey, a partner at law firm Dorsey & Whitney, says that he knows of ‘several companies that have been put out of business’ as a result of Customs’ position.

Recent events at the ECJ orginate in the summer of 2002, when Customs acted to stop the leakage of billions of pounds of VAT from organised crime gangs taking advantage of the European Union’s single VAT system.

Because trading between member states is effectively VAT-free, fraudsters would ‘carousel’ the same goods, and then sell them through unaware dealers to complete the circle. Customs, however, pursued these innocent dealers, as well as the guilty parties, to recover the lost VAT.

Carl Boraiko, a director of Dragon Futures, which is understood to be owed as much as £16.5m by Customs, says that his company has been held to account for ‘someone else’s alleged fraud’, leading it to pull out of the UK.

Boraiko hopes that the three companies fighting it out in a test case at the ECJ – Bond House Systems, Fulcrum Electronics and Optigen – will lead to the return of money rightfully belonging to his company.

Hassan Khan, the solicitor acting on behalf of Bond House, says the opinion from the advocate general accepted taxpayers’ arguments that Customs’ grounds for stopping hundreds of millions of pounds worth of VAT refunds are ‘flawed, without foundation and violate the basic principles of European law’.

City law firm McGrigors is hoping to establish a group claim for companies looking to reclaim millions of pounds owed to them by Customs, as well as damages due to lost business.

Simon Collins, a partner at McGrigors, says Customs is continuing with its aggressive stance, despite the obvious concerns that the ECJ will overrule the government.

‘We will file claims before the final ECJ decision because it will put added pressure on Customs,’ says Collins. ‘It shouldn’t be using a blanket policy, but should be looking at this on a case- by-case basis.’

A Customs spokesman confirms that the department will continue to use the measures it currently employs, but that if the ECJ ultimately rules against the government it ‘will pay back any amounts due’. He added that if a trader is having repayments delayed pending further investigations, they will have access to a VAT tribunal.

Don Mavin, a director in the VAT investigations team at Chiltern, says his firm has been ‘acting for a number of clients who have been struggling financially, as Customs has withheld VAT owing for over two years now’.

‘We sincerely hope that the ECJ will endorse this opinion and see that these innocent parties are refunded what is rightfully owed,’ says Mavin.

Customs remains predictably vague, saying that it ‘notes the advocate general’s opinion’, but adds that it must wait for the judgement of the full ECJ court.

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