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HM Customs VAT probe paralyses UK CPU broking

Traders threaten legal action

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The UK CPU broking market has been paralysed in recent weeks, following an industry-wide delay in refunding VAT payments on export sales.

HM Customs & Excise confirmed this week that it is conducting "extended verification" of claims submitted by traders in computer chips and mobile phones.

Exporters pay VAT upfront on shipments overseas and then reclaim the tax by submitting monthly returns. Typically, refunds are made by Customs two weeks after the end of each month.

But a freeze in June and July VAT repayments has torpedoed the cash flow of CPU brokers, which typically operate on small margins. The action destroyed the ability of the brokers to trade throughout August. Glyn Mosses, owner of Wokingham-based Harringtons Ltd, said: "My normal VAT refunds are £3-£4m a month. In August my claim was £16,000." His business is owed £9m by HM Customs & Excise, he says.

GSI Distribution Europe, a leading CPU exporter based in Chelmsford, says it was able to conduct just three deals in August, as a direct consequence of the VAT freeze.

The freeze is having a knock-on effect in September. The Register understand that approx. 20 of the smaller traders received their VAT refunds last Friday, and that the biggest traders, numbering no more than 10, can expect to see refunds in their accounts next week.

Missing Trader Intra Community fraud, as it is officially dubbed, is the EU's biggest source of fraud, costing the UK alone an estimated £1.7bn- £2.6bn in 2000-2001.

Because of their high-ticket, commodity status, computer chips and mobile phones are favourites with so-called missing VAT trader fraud gangs. In this simple fraud, traders import goods VAT free, then sell the goods supposedly with VAT applied. Usually, the goods are sold cheaper than with pukka-VAT transactions, ensuring a quick turn for the fraudster, who then disappears without paying VAT to Customs.

But longstanding CPU exporters have slammed Customs for a catch-all action, which is harming legitimate businesses. They already follow very rigorous procedures implemented by Customs, they point out. According to advice from legal counsel, HM Customs’ action in freezing payments seems unlawful, according to GSI, which is contemplating legal action.

Dean Johnson, GSI managing director, said: "We provide Customs with a full list of new customers, and new suppliers and their bank accounts and their VAT details by fax. And we only trade with these companies when we have received authorisation from Customs. Every single month we have Customs come into check us. We do everything we are told to. And now this. What are we supposed to do?"

A Customs spokesperson told The Register that the organisation is currently conducting a co-ordinated programme to verify submitted VAT claims in areas "rife with fraud". This is Customs entitlement and part of its duty "in the care and management of VAT".

The Customs spokesperson said: "It is not Customs’ intention to delay payments that are lawfully due... Legitimate businesses have nothing to fear from us,". Traders can appeal to a VAT tribunal or seek judicial review if they believe that payments have been unlawfully delayed, he added.

Companies such as Harringtons and GSI operate a useful safety valve for the worldwide CPU spot or grey market. Typical suppliers of the CPU brokers are big OEMs buying large quantities of Intel and AMD CPUs at favourable discounts directly from the manufacturer. According to Gartner Dataquest analyst Brian Gammage, these OEMs are actively buying CPUs to trade in the spot market, as well as using it to push out overstocks.

Typical buyers for the CPU exporters are smaller system builders which otherwise would have to buy through distribution. By buying from the spot market, even though credit terms are not often extended, smaller system builders can get access to cheaper prices. "If you get your Intel CPU £10 a part cheaper, and you are building a thousand units a month, your savings quickly mount up," Harrington's Mosses points out. "And that means cheaper prices for end-users." ®

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