United Kingdom - VAT claim denials 'putting firms at risk'

CCH Fee Protection claimed that despite a European Court of Justice (ECJ) ruling which said businesses are entitled to VAT repayments where "reasonable" anti-fraud checks have been carried out, the Revenue is withholding many claims stretching back up to two years.

It warned that many innocent businesses have already been pushed into bankruptcy because of the delays in refunding VAT to which they are entitled.

The ECJ ruled that where a supplier acts in good faith and submits evidence establishing the right to exempt a transaction from VAT, HMRC cannot withhold VAT if the information relied on subsequently proves to be false.

But CCH warned the government department is still unlikely to refund the tax to traders caught in lengthy supply chain frauds, despite the majority having undertaken ‘reasonable’ checks approved by HMRC itself.

Glyn Edwards, VAT consultant at CCH Fee Protection, said: "This ruling upholds the principle that if businesses conduct reasonable checks and are not party to fraud,

"HMRC should not withhold VAT from them. That applies to the vast majority of businesses from whom HMRC is denying VAT claims, but it won’t voluntarily return the money, which is likely to trigger a wave of costly litigation. "HMRC will claim that this ruling only applies to exporters who conducted reasonable checks of export documents and not other traders in the supply chain – but any distinction between the two is essentially false. The same principle should apply."

Edwards claimed that losses to the taxpayer from carousel fraud are falling but this is in large part due to HMRC withholding legitimate claims.

"It's a form of collective punishment," he added. "Innocent businesses are subsidising the fraudsters. HMRC is digging its heels in over legitimate VAT repayments because it can't catch the real criminals."

Carousal fraud occurs when criminals trade goods such as computer chips or mobile phones across EU borders, where rules state that they are exempt from VAT.