ECJ issues carousel warning to traders

A shot had been fired across the bows of companies who may be trading in
goods from carousel fraud chains, advisers said this week in response to a new
judgment from the European Court of Justice.

In the latest development in HMRC’s attempts to hold third parties
responsible for the losses from carousel fraud, the ECJ ruled that companies
could be held ‘joint and severally liable’ for the tax evaded if they deal in
the fraud chains, which commonly involve the sale of hi-tech portable goods such
as microchips and mobile phones.

Traders unwittingly drawn into the chain could be held liable unless they
have taken all reasonable precautions to protect themselves, the court said.

The decision comes as HMRC faces rising criticism over the possible losses
from frauds, which have been estimated to be as much as £7bn this year.

What amounts to ‘reasonable precautions’, however, is unclear, and could see
innocent traders picking up the bill for VAT frauds.

Hassan Khan, tax litigation specialist at Hassan Khan & Co, who acted for
Bond House systems in an earlier ECJ case, welcomed the ruling.

‘As expected the ECJ has determined that the joint and several liability
measures adopted by HM Revenue & Customs are lawful,’ Hassan said.
‘Importantly, however, it has also recognised that legitimate traders are
entitled to protection from these to the extent that they offer reasonable

The Bond House case had concerned attempts by HMRC to designate traders in
the carousel chains as having been engaged in ‘non-economic’ activity, and hence
unable to reclaim VAT paid.

That argument failed, though the new suggestion of joint and several
liability does help to shore up part of HMRC’s position, advisers suggested.

‘The idea is to try and get traders to be more responsible and less greedy,’
Stephen Coleclough, the VAT adviser at Pricewaterhouse-Coopers, said.

If traders were approached with plans to make huge profits within a short
time frame on large amounts of mobile goods, they ought to be asking questions
as to how the money is made, he said, adding that the new rules would help to
tighten up traders’ procedures.

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