Customs crackdown overturned by court

The government could be forced to pay back more than £200m after suffering a potentially humiliating defeat before the European courts.

The government could be forced to pay back more than £200m after suffering a potentially humiliating defeat before the European courts.

A preliminary ruling by the European Court of Justice overturned a decision by Customs and Excise not to give refunds on value-added tax (VAT) paid on purchases of mobile phones and computer chips.

Customs issued the block as part of its crackdown on "carousel" fraud where criminals claim VAT refunds on goods they simply repeatedly import and export through the European Union.

The practice is estimated to cost £1.7bn in lost revenue to Customs, which responded by refusing to refund VAT to the top 20 exporters of mobile phones and computer chips. Last year it held back £201m in refunds.

Three of the companies, Bond House Systems, Optigen and Fulcrum Electronics - which is in liquidation - took their case to the Luxembourg court.

Luis Maduro, an advocate general at the ECJ, backed their claim, saying the move had "dramatically shifted" the burden of the problem from the Government to individual innocent traders. Although Mr Maduro's opinion does not bind the court, the ECJ usually follows the line taken by the advocate general.

Don Mavin, the director of the VAT investigations team at Chiltern, a tax advice firm, said the decision was a "devastating blow" to the approach taken by Customs over the past two to three years. "Today's decision is excellent news for many businesses who have been inadvertently caught up in this overly aggressive campaign by Customs," he said. "We hope that the European court will endorse this opinion and see that these innocent parties are refunded what is rightfully owed."

A spokesman at Customs and Excise said it would continue to apply the policy until the court issued its final ruling.