The ECJ and VAT Carousel Trading 
The introduction of European VAT has allowed many tax frauds. The following VAT fraud was committed by using computer equipment (the most frequently used goods for VAT fraud).
Taking advantage of VAT exemptions, computer equipment was bought at zero-rate VAT from a trader in a member state and then sold to other traders (with VAT added to the original purchase price) at a low profit margin.
The fraud consists of keeping the VAT billed and not declaring it to the tax authorities.
The tax authorities realised that “ghost” companies were formed, had realised a significant turnover and were liquidated within a short time period.
By the time that the fraud was discovered, the company directors had disappeared.
To recover the VAT, the innocent traders who purchased the goods initially were not allowed to recuperate the VAT paid.
The innocent traders appealed to the European Court of Justice.
On the 12th January 2006, the European Court stated that a trader’s right to recuperate VAT cannot be affected by the fact that, unbeknown to the trader, there is a prior or subsequent transaction existing in the chain of supply which has been vitiated by tax fraud.
A second decision was made on the 6 July 2006, that the right to recuperate VAT was refused as the trader knew or should have known that he was participating in a transaction implicating VAT fraud.
When the VAT refund is refused, the taxpayer is obliged to prove that he was fully ignorant of the fraudulent nature of the transaction, even though he has neither the time nor the means of controlling his suppliers.
