UK decision gives insight into scope of “carousel fraud” in the UK – losses in excess of £15 billion

On 10 April 2012 the UK First Tier Tribunal handed down its decision in Sound Solutions (Europe) Ltd v Revenue & Customs [2012] UKFTT 251. The case provides an insight into the extent of “missing trader fraud” or “carousel fraud” in the UK, usually involving the sale of computer chips and mobile phones.

This type of VAT fraud received some focus in Australia recently in Multiflex (see [2011] FCAFC 142), where the Commissioner had a suspicion that an investigation would disclose that Multiflex did not in fact make creditable acquisitions giving rise to the claimed input tax credits.  The evidence of the Commissioner’s auditor was that three companies in the same group as Multiflex had been involved in “sham transactions through a supply chain”.  The arrangement was described as follows:

The first company in the supply chain imported electronic goods into Australia, they were then on-sold (usually on the same day) through several different intermediary or buffer companies.  These products were not entered into Australia for domestic consumption but remained in a bonded warehouse.  Each of the companies in the Mercantile Group…was the final link in the chain and operated as the exporter.  Non- reporting of GST by the “missing traders” in the supply chain has lead to revenue leakage.  The tax office position in that the supply chain was a contrived sham arrangement for which the Mercantile Group was a participant.  In the United Kingdom this type of fraud is called “missing trader intra-community fraud”.  The revenue leakage is caused by the non-reporting of GST by the “missing trader”.  This and similar frauds have apparently cost the Government in the United Kingdom a significant sum of tax revenue.

In the decision of the First Tier Tribunal, the evidence from the Revenue was that carousel fraud was rife from 2003 to 2007.  Further, any loss to the exchequer only occurs when the input tax is refunded on a repayment claim.  The Revenue was been repaying substantial sums of money, in many cases in excess of £10,000,000 and the total loss to the revenue during these years amounted to in excess of £15 billion.

The position in the UK on the refunds of input tax credits is similar to that considered in Multiflex, in that the refund provisions are in mandatory terms and that no element of discretion is conferred on the revenue.  Of course, the position in Australia will change if the amendments to the TAA to introduce s 8AAZLGA are introduced (giving the Commissioner the right to withhold refunds pending an investigation).  Interestingly, the law in the UK developed its own defence to the mandatory refund provisions. Because the claimant of the refund was usually a long way down a chain of transactions from the defaulting entity, the Courts extended the established principles of fraudulent evasion beyond evasion by the taxable entity to include those entities who knew or ought to have known that by their purchase they were taking part in a transaction connected with fraudulent evasion of VAT.  This enlarged the category of participants who did not satisfy the objective criteria of being entitled to claim credits to those who themselves had no intention of committing fraud, but who, by virtue of the fact that they knew or should have known that the transaction was connected with fraud, were to be treated as participants.

The decision of the First Tier Tribunal undertakes a detailed investigation into the development of the law in this area and the judgment shows the level of complexity and sophistication of these types of transactions.  One would suspect that such transactions are being undertaken in Australia, as is shown by the Multflex decision.  As to whether the level of such activity reaches the giddy heights of the UK experience, and the effect on these schemes of the proposed amendments to the TAA allowing the Commissioner to delay refund payments, time will tell.

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