VAT fraud verdict is condemned

Honest traders in mobile phones and computer chips may pick up the bill for criminals involved in VAT fraud after a major test case victory for Customs & Excise.

The ruling, made at a VAT tribunal in Manchester last week and due to be made public on Tuesday, means legitimate traders could be refused payment of VAT by Customs in cases where other traders in the trading chain are involved in VAT fraud. This marks a significant victory for Customs against VAT missing trader fraud, which has been spiralling out of control since the mid-1990s. But, according to Don Mavin, tax consultant at WJB Chiltern: "It comes across as a pretty unjust tax system, where innocent traders might be being penalised for the actions of criminals and the failure of Customs to identify the fraudsters."

Customs was challenged by Bond House Systems (BHS), one of the UK's largest computer components wholesalers. BHS faces a loss of £13m, even though it was not a suspect in the missing trader fraud Customs was investigating. Last year Customs admitted losses to the taxpayer were running up to £2.75bn per year, as criminals, including former armed robbers and drug smugglers, took advantage of loopholes in European Union trade rules. British criminals based on the Costa del Sol are known to be involved in the fraud, taking up to £25,000 a week off the taxpayer.

BHS's dispute with Customs began last summer when Customs carried out a nationwide exercise to halt the fraud. Supply chains were checked back to the goods' point of entry into the UK from the EU, mostly from Ireland and Spain. At the same time, VAT repayments claimed by traders were also withheld.

A large amount of mobile phone fraud is located around Stoke-on-Trent, where 400 Customs officers have been deployed. Despite publicity surrounding ongoing trials, local sources claim that businessmen are still being recruited to take part in the scam.

Last month, the Chancellor announced he would be giving Customs draconian powers to combat VAT fraud. All traders in a supply chain will now be held liable if any one of them evades or is thought likely to evade VAT.