Innocent channel companies will be wrongly penalised unless changes are made to legislation authorising a crackdown by HM Customs and Excise on VAT missing trader, or 'carousel', fraud.
That is the claim from a leading VAT specialist, which is calling for UK firms to lobby the government to modify Customs' Joint and Several Liability legislation, part of the 2003 Finance Bill.
Under sections 17 and 18 of the legislation, which apply to the mobile phone and IT industries, any business that becomes unknowingly involved in VAT fraud can be held liable for unpaid VAT.
Tim Buss, VAT director at insolvency specialist PKF, said: "This type of fraud is extremely prevalent, due to the value of the goods involved and the ease with which European single market rules can be exploited.
"If the legislation were changed to charge VAT at source, a lot of innocent companies would be spared. The industry needs to make a stand to ensure that the government combats fraud without innocent parties suffering."
According to figures from the National Audit Office, the amount of VAT lost to fraud in 2002/2003 was £11.9bn, representing a deficit of 15 per cent. The government has set Customs a target of reducing this figure to 12 per cent by 2005/2006.
A Customs representative said: "Legitimate businesses have nothing to fear, but they do have a role to play in ensuring they don't get unwittingly caught up in this type of fraud.
"The measure is purely aimed at criminal gangs targeting the VAT system.
"Allegations that this legislation is unfair are untrue. It was implemented after lengthy discussions with industry. We didn't just sit in an ivory tower and make a decision."
The Federation of Technological Industries (FTI), a body which represents mobile phone, chip and component traders in the UK, is pursuing Customs in the European Court of Justice to try to get the legislation dropped completely.
Anthony Elliot-Square, chairman of the FTI, said: "Customs has struggled to catch all VAT fraudsters, and it has gone for a sledgehammer approach.
"Although it did go through a consultation process it didn't consult the people this would affect. I sympathise with Customs, but some of the methods used to implement the legislation are draconian and constitute a breach of human rights."
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