The case before a VAT and Duties Tribunal concerned Missing Trader Intra-Community (MTIC) VAT fraud which is a top priority for Customs at the moment. It occurs where fraudsters obtain VAT registration to acquire goods VAT-free from other Member States. They then sell on the goods at VAT inclusive prices and disappear without paying over the VAT paid by their customers to the tax authorities.
At present the loss to the British taxpayer is estimated to be between £1.7 billion and £2.75 billion.
In a statement, Customs confirmed that the test case concerned the question of whether business transactions entered into by Bond House Systems Ltd, a computer component wholesaler, amounted to economic activity.
Customs contended that as the goods involved were repeatedly traded within a group of companies, without being sold to an end user, there was no true economic purpose to the transactions. Customs further contended that the transactions formed part of a carousel, or MTIC fraud though Bond House Systems was not alleged to be a knowing participant in this fraud.
As a result of these contentions, Customs believed that the transactions in question fell outside the scope of VAT. If this was the case the repayment claim being made by the company was invalid as the sums it was reclaiming were not VAT.
The Chairman of the Tribunal, Mr Colin Bishopp, decided almost entirely in the favour of Customs. A spokesman said:
"Today's decision confirms Customs' entitlement to deny repayment claims where the transactions do not amount to economic activity. In other words the tribunal agreed that Customs was right to disallow the majority of a repayment claim where a chain of transactions had occurred which did not in reality involve taxable supplies."
The decision has implications for legitimate traders, who may find themselves without a VAT rebate if a supplier down the chain is involved in this particular type of fraud.
Don Mavin, tax consultant at WJB Chiltern, told the Independent, "It comes across as a pretty unjust tax system, where innocent traders might be being penalised for the actions of criminals and the failure of Customs to identify the fraudsters."