U.K. government targets high-tech tax fraud

The U.K. has applied to opt out of Europe-wide laws governing value added tax, a kind of sales tax, in an attempt to clamp down on criminals who use computer components to commit fraud.

Her Majesty's Revenue and Customs (HMRC) said Friday that it would be able to more effectively combat VAT fraud if the European Commission allows the changes to U.K. law.

VAT fraud, also called missing trader fraud, occurs when a company charges VAT on a sale of goods but doesn't return it to the government. Typically, those involved will move wholesale goods, such as mobile phones and processors, between European countries.

In the past, some U.K. technology companies have suffered--and in some cases have gone bust--when they bought goods that had previously been used in such a fraud. They were unable to recover the VAT that they paid when they bought the goods, because that VAT had not been paid to the government by the fraudsters.

The U.K. government wants to pull the rug from under such fraudsters by asking if it can change the way VAT is handled. At present, every link in such a chain pays VAT and then recovers it from the government. Under the government's proposal, the tax would only be levied at the end of the chain when the goods are sold to U.K. consumers.

"We're requesting to operate under different conditions, by taking out the mechanism that criminals use to commit fraud," an HMRC representative said.

"I hope that the Commission and other member states will look favorably on our request, and that the U.K. can implement the proposed changes as soon as possible," Dawn Primarolo, the paymaster general, said in a statement.

Germany and Austria also have put in a request to opt out of part of the European VAT law.

The U.K. government's request comes after the European Court of Justice dealt a blow to the U.K.'s efforts to tackle tax fraudsters. Earlier this month, the court ruled that three companies, including two computer processor resellers, were entitled to reimbursement of their VAT.

The companies had been fighting a decision by the U.K. VAT and Duties Tribunal which said they could not claim VAT back on electronics equipment that may have been used in fraud.

One of the technology companies involved in this case was forced to cease trading, after the withdrawal of a VAT refund.

Tom Espiner of ZDNet UK reported from London.