The threat of insolvency is now looming over previously viable businesses after a new government crackdown, designed to quash so-called 'carousel' fraud, pushes the burden of VAT liabilities onto companies innocently caught up in the scams.
A strong warning has gone out to insolvency practitioners to be on their guard for failing companies brought down by unknowing involvement in the frauds.
Matthew Johnson, insolvency lawyer at City law firm DLA, told Accountancy Age innocent businesses often get caught up in carousel fraud because they think they are getting a ‘good deal on VAT’. ‘Insolvency practitioners should be aware of this issue because the law will increase the number of companies going out of business,’ warns Johnson.
Carousel cases involve unscrupulous traders who acquire VAT-free goods from a company in another EU member state. The goods may be passed on several times but sooner or later one of the traders just disappears without accounting to Customs & Excise for the duty. The fraudulent traders also sometimes claim back tax from the sale of non-existent goods.
The new crackdown on the VAT scams involves a two-pronged approach: a test case – the Bond House case – that is currently going through the courts, and legislation, passed by the government last April, that makes all traders in a chain ‘joint and severally liable’ for unpaid VAT.
PKF business recovery partner Nitin Joshi said: ‘The VAT man will chase whoever has the money when the carousel stops. This will result in huge losses and may lead to financial distress. Often, the perpetrators have liquidated their various businesses, leaving innocent companies behind to face the music.’
But being unwittingly liable for millions of pounds worth of tax can mean death to companies.
In May of last year, Customs refused to pay Bond House, a computer components supplier, £13m it had claimed in input tax. Bond House unsuccessfully attempted to appeal the decision before Manchester Crown Court. But in March, the court ruled the company’s claim was ‘devoid of economic substance,’ even though it knew nothing of the carousel. As a result of the loss, Bond House was forced to cease trading but it is expected to appeal.
Meanwhile insolvency practitioners prepare for a flood of failed companies due to carousel schemes.
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