There has been considerable comment in the media on the cost (estimated at £1.7 – 2 billion per year) of carousel VAT fraud – yet within the secondary or "grey" market for mobile phones, computer chips and the like, innocent traders are suffering significant hardship as a result of a change in HM Revenue and Customs practice.

Carousel fraud is often characterised by a circular chain of transactions involving high value, high volume goods such as mobile phones and computer accessories traded across the EU. In its simplest form – usually in concert with a wholesaler of these goods situated in another EU country (the "ring master") – the "defaulting trader" will purchase from the ring master, and import into the UK substantial quantities of such goods. The defaulting trader will register for VAT in the UK (or brazenly hijack another trader’s VAT number), charge VAT on the onward sale to an innocent wholesaler, and then abscond without accounting to HM Revenue & Customs for the VAT.

Once the goods have entered the UK market, they rapidly pass through several wholesalers (often within a single day) before they are acquired by an exporter for despatch to another EU country. In acquiring the goods, the exporter will have paid VAT at the standard rate, and subject to satisfactory evidence of their export, VAT will not be chargeable on their despatch from the UK.

Exporters look to HM Revenue & Customs for repayment of the VAT incurred on the acquisition of exported goods. Since their business model is highly dependant upon such repayments being processed expeditiously, they have a vested interest in ensuring – insofar as possible – that their supply chains are not tainted by fraud. Many will have adopted rigorous procedures to check up on the credibility of all transactions. Until recently, the tax authorities would make repayments within 30 days, or where they were carrying out checks into the transaction chain, on a without prejudice basis.

However, HM Revenue & Customs has recently adopted administrative measures to withhold VAT repayments from exporters, principally to disrupt trading within the sector. Before claims are released, the authorities are carrying out extended verification into whether an exporter knew (or had the means of knowing) of the incidence of VAT fraud in the chain, or should be held partly responsible for the loss of the tax because it failed to check the integrity of the supply chain.

Over 300 exporters have outstanding claims well in excess of £500 million, with the majority of them lodged more than six months ago. The actions of the tax authorities is having a very significant impact on their businesses. Recognising the legitimate concerns of exporters, Mills & Reeve has brought a claim on behalf of a group of distinguished export companies for judicial review of the actions of HM Revenue & Customs.

 In our opinion, the approach adopted by the authorities is disproportionate, it unfairly discriminates against exporters and infringes well established principles of both EC and UK VAT law and amounts to negative state aid. On behalf of the group, we will be seeking an order that repayments be made immediately, together with interest and damages for losses sustained by the businesses.