Replies to post #5915 on TriCell LTD (fka TCLL)

[trailorparkboy]

Here's an article explaining the VAT carousel frauds, if anyone is interested



cent trader in VAT carousel fraud retains entitlement to input tax deduction
The ECJ has held that an innocent trader does not lose his right to VAT input tax deduction merely because his input was part of a transaction chain to mask a carousel fraud committed by other parties.

Three UK companies appealed against Customs and Excise decisions rejecting their input tax deductions because they were trading in goods used by other parties as the subject of a VAT "carousel" (merry-go-round) fraud. In each case, the trader had a large net recoverable from his local purchases of computer components for export. A carousel fraud is committed by a trader who buys goods from another EU state for resale locally. His customer, the so-called "buffer" correctly accounts for the VAT on his purchases and sales. His sales are to another buffer. Ultimately, the goods are sold back to the country of origin, and end up in the hands of the original supplier. The process is then repeated. The perpetrator of the fraud does not account to the authorities for the VAT charged to the first buffer and absconds with the cash once they start looking into his activities. He then becomes known as the "missing trader".

In a carousel fraud, the missing trader is necessarily guilty, but some of the buffers and the original supplier may be innocent. Computer components and mobile phones are examples of goods particularly prone to carousel fraud - high value, low weight items frequently traded around the EU in large quantities and thus, at the wholesaler level, not susceptible to individual identification. In the cases currently at issue, the traders had played the role of final buffer in the country of the missing trader, that is they had taxable inputs - their purchases from the penultimate buffer - and tax-free outputs, their sales to the country of the original supplier. In all three cases they were innocent of wrong-doing. They did not know of the fraudulent intent and could not have known of the fraud itself, not least since the offence had not yet been committed. The UK Commissioners of Customs and Excise took the view that, innocently or not, the companies had played a part in a fraudulent chain of transactions and were not therefore engaged in economic activity. This alone was enough to deny them input tax deduction. The traders protested and ultimately the cases came before the ECJ which joined them in a single trial.

The ECJ decided in favour of the innocent traders. "Economic activity", "supply of goods" and "taxable person acting as such" are objective terms, unaffected by the purpose or results of the transactions, or by earlier or later events in the transaction chain. Provided the transactions are lawful in themselves, the right to input tax deduction cannot be denied to a trader because of a fraud by another member of the transaction chain, "of which that taxable person had no knowledge and no means of knowledge". The court was at pains to emphasise the distinction between lawful transactions misused for fraudulent purposes by another party and those unlawful in themselves (such as trafficking in drugs) which cannot be "incorporated into economic channels". It also emphasised that the correct payment of the VAT on an earlier or later sale of the same goods is irrelevant to the input VAT deduction of the given taxable person.