The approach taken by the Customs and Excise Commissioners in viewing the whole of the transactions comprising a carousel fraud in order to see the reality of a circular avoidance scheme was not contrary to the prohibition on taking a global view of transactions for Value Added Tax.Determination of a preliminary issue arising from appeals by Optigen Ltd and Fulcrum Trading Co (UK) Ltd ('the appellants') from decisions of the Customs and Excise Commissioners to disallow various claims for the repayment of input tax. Both appellant's traded in computer chips. In October 2002 the commissioners notified Optigen that ?20 million in input tax claims would be disallowed in respect of forty purchases made by them in the middle of that year. In late 2002 and early 2003 the commissioners also notified Fulcrum that £3 million in input tax claims would be disallowed in respect of eight purchases made by them in the middle of 2002, and also that a further sum of £159,000 had been assessed as tax due in respect of a ninth purchase made during VAT period 05/02. The commissioners accepted that the appellants were innocent parties to transactions forming part of a carousel fraud in computer chips. The various decisions made were appealed and the Tribunal directed the determination of the preliminary issue of whether a trader was entitled to credit for input tax on goods sold to him (and sold to companies outside the UK) when: (i) in the chain of supply of such goods there was a missing trader or a trader using a hijacked VAT number, without in either case the trader who is claiming the credit being in any way concerned with or having any knowledge of such other trader's failure to discharge the liability or misappropriation of a VAT number; and (ii) the chains of supply within which the sales to and by the trader took place were, unbeknown to the trader, part of a carousel fraud by others. The appellants contended that: (a) neither illegal trading cases nor tax avoidance cases were analogous to their position as they had no knowledge of any fraud; (b) the questions of economic reality had to be looked at for each separate transaction; (c) disallowing their input tax was a disproportionate approach; (d) legal certainty was an applicable and fundamental principle of community law, particularly as the transactions concerned had financial consequences; (e) the disallowance of input tax was in the form of a penalty; (f) there should be no discrimination between taxpayers; and (g) that ambiguities ought to be determined in favour of the taxpayer. The commissioners' submitted that carousel frauds were not commercial activities and were outside the scope of VAT.HELD: (1) In its simplest form a carousel fraud consisted of the following transactions: (a) a company in another Member State sold goods to a UK company; (b) that company paid tax on the acquisition and reclaimed it as input tax before selling the goods to another UK (buffer) company at a loss, charging output tax for which it never accounted; (c) the goods might then be sold on through other buffer companies, each of which charged and reclaimed tax; and (d) finally, the goods would be sold to a broker who would then re-sell them to the same EU trader at the price the goods were originally sold to the first UK trader as a zero-rated supply, reclaiming the input tax which was the subject of dispute in the present case. (2) The commissioners' approach of viewing the whole of the transactions comprising the carousel fraud in order to see the reality of such a circular tax avoidance scheme was not contrary to the prohibition on taking a global view of transactions for VAT. The consequence of so doing was that neither the appellants nor any of the other participants had carried out an economic activity, the goods having gone round in a circle and left the UK at the same price at which they had originally been imported. It followed that regardless of the appellants' intention to carry out an economic purpose, all the transactions fell outside the scope of VAT as they had no real purpose other than to defraud the commissioners. (3) There was no breach of the principle of legal certainty as the reason why the appellants did not know precisely the extent of their VAT obligations was due to a fraud of which they had no knowledge rather than to a lack of clear and precise rules. (4) Despite the effect on innocent parties such as the appellant, to treat circular fraudulent activity as outside the scope of VAT was not disproportionate. (5) Since the commissioners proposed to treat all participants in a carousel fraud as not having carried out an economic activity there was no unequal treatment or discrimination between different traders. (6) It followed that the answer to the preliminary issue was in the negative.Decision accordingly.

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