Opinions given by Advocates General are highly influential and are usually followed by the Court.
The opinion concerned the joint cases of UK firms Bond House Systems Ltd, Optigen Limited and Fulcrum Electronics Ltd (in liquidation) – all three of which had innocently found themselves in the middle of a Missing Trader Intra-Community (MTIC) VAT fraud.
MTIC VAT fraud, also known as carousel fraud, occurs where fraudsters obtain VAT registration to acquire goods such as chips and mobile phones 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.
Recently, authorities have taken action against the fraud by considering all the transactions in a chain of supply involving a missing trader or a hijacked VAT number and refusing to repay VAT to any company involved in that chain of supply.
According to Customs, when considered as a whole, the transactions, even involving innocent parties, are a non-economic activity for VAT purposes and no rebates are necessary.
This approach was upheld by VAT and Duties Tribunals in cases brought by Bond House Systems Ltd, Optigen Limited and Fulcrum Electronics Ltd. All three firms appealed to the High Court, which subsequently made a combined referral to the European Court of Justice on the question of whether the three companies were carrying out an economic activity when they unwittingly became involved in the fraud.
Issuing his opinion last week, Advocate General Maduro, found that each transaction in the supply chain must be considered on its own merits. "Consequently," he said, "the character of a particular transaction in the chain cannot be altered by earlier or subsequent events."
It is therefore not necessary to look at the underlying purpose of the transactions – in this case to commit fraud. Any other approach, said Maduro, would be hard to reconcile with the relevant EU VAT Directive, and give rise to considerable legal uncertainty.
"The United Kingdom seems to envisage combating carousel fraud – or at least dispensing with the problems it poses – by limiting the scope of the VAT system," said the Advocate General. "To my mind, the Court should not consent to this approach. It would drastically shift the burden of the problem from the tax authorities to the private sector, at the expense of legitimate trade and the proper functioning of the VAT system. Moreover, it would deter Member States from taking appropriate measures against carousel fraud."
Don Mavin, Director of the VAT Investigations Team at tax specialists Chiltern plc said: "Snr. Maduro has given Customs an extremely strong hint that the way to tackle carousel fraud is to go after the actual fraudsters – and not simply their innocent victims."
He described the decision as "excellent news for many businesses who have been inadvertently caught up in this overly aggressive campaign by Customs."
But Chiltern also warned that since Customs has stated it will continue to issue VAT assessments where the 'non economic activity' principle has been established until the European Court of Justice rules otherwise, companies need to ensure they have satisfactory due diligence procedures in place to verify their suppliers and customers in order to minimise the risks of a VAT liability arising from trading in these markets.