Multinationals and VAT compliance in the United Kingdom.

• Author: Meghjee, Kassim
• Position: Value-added tax

Introduction

Several recent developments should cause multinationals to review their value-added tax (VAT) compliance obligations in the United Kingdom. These developments include the imposition of additional compliance requirements that should be observed by multinationals to avoid being penalized for unknowing participation in "carousel fraud." Those conceiving this type of fraud may exploit the credibility of multinationals to give effect to the fraud. This article discusses carousel fraud in the context of: (i) two recent European Court of Justice (the ECJ) cases, (ii) the changes to U.K. law (and certain ECJ challenges to U.K. law), (iii) the current practice of HM Revenue & Customs (the "U.K. tax authority"), and (iv) U.K. law relating to vicarious liability for fraud. The article then summarizes VAT-related compliance obligations for multinationals operating within the U.K.

Carousel Fraud

In its simplest form, a carousel fraud involves three businesses in two EC Member States:

Company A in one Member State (say, Belgium) sells taxable goods to Company B in another Member State (say, the U.K.). Company A does not charge VAT on that supply if Company B is a taxable person in another EC jurisdiction and has supplied Company A with its VAT registration number. (1) Company B must account for VAT to the U.K. tax authority, but Company B is also entitled to claim credit for the tax simultaneously and therefore does not have to pay any amount when it acquires the goods. (2) Company B then sells the goods to Company C (in the same jurisdiction) charging VAT at a rate of 17.5%, the rate for a standard rated supply in the U.K. Company B must account for the VAT it has received from Company C, but Company B "goes missing" without doing so. Company C then sells the taxable goods to Company A (i.e., the original seller based in Belgium). Company C has no obligation to charge VAT on the same basis as the supply from Company A to Company B--the goods would then circulate around the same group again (the reason this type of fraud is known as "carousel fraud"). Company C then claims credit for VAT which it has paid to Company B. (3) The U.K. tax authority loses out because it pays or owes Company C a credit, but it never receives any VAT from Company B. In practice, this type of fraud typically involves longer and complex chains that, more often than not, involve the trade in cell phones and computer processing units. These chains may include the export of goods from one EC Member State and the import of the goods into another to thwart the EC tax authorities' information sharing drive. Innocent parties are interposed in the middle of these chains to conceal the fraud (4) and give the transactions superficial credibility. This is what poses the greatest risk to multinationals.

Recent ECJ Cases

Two recent ECJ cases involving carousel fraud provide insight into current law and practice with respect to VAT.

Optigen Limited v. Commissioners of Customs and Excise; Fulcrum Electronics Ltd v. Commissioners of Customs and Excise; and Bond House Systems Limited v. Commissioners of Customs and Excise (Joined Cases C-354/03, C-355/03 and C-484/03) ("Optigen Limited"), involved buying computer processing units from businesses in the U.K. and then selling them to purchasers in another EC Member State. The U.K. tax authority had refused VAT refund claims by these companies, asserting that their purchases were part of a chain of transactions involving a trader not discharging its VAT liability or using a "hijacked" VAT number belonging to someone else.

Optigen Limited involved innocent third parties whose claims for credit for VAT were denied by the U.K. tax authority on the basis that the transactions were part of a supply chain where another transaction was fraudulent. The U.K. tax authority determined that such transactions were devoid of economic activity (and thus the amounts paid were technically not "VAT") and therefore contended that these claims should be denied credit for "VAT" paid, even though the tax authority recognized that the claimants were neither involved in the fraud nor were aware of it. The ECJ, however, disagreed with the U.K. authority and held that each transaction in the chain had to be analyzed independently. If such a transaction satisfied the usual objective criteria for a taxable supply--(i) it is a supply of goods or a supply services; (ii) it is effected for consideration; (iii) it is made by a taxable person in the course of its business (iv) made within the territory in which the person is registered; and (v) it is not an exempt supply--it would still be within the scope of VAT "regardless of the intention of a trader other than the taxable person concerned ... and/or the possible fraudulent nature of another transaction in the chain ... of which that taxable person had no knowledge or no means of knowledge." (5) The court also held that the right to claim credit for the VAT incurred could not be affected by the fact that, without knowledge of the taxable person, there was fraud in the chain of supply. (6)

The second ECJ judgment is the joined cases of Kittel v...