If there is a real risk that the Revenue will refuse to repay the UK broker’s input tax, the carousel stops because the UK broker cannot afford to carry the loss. The fraudsters’ response to refusals was to create a system in which the UK broker does not have to reclaim input tax – hence ‘contra-trading’. Instead of exporting the goods and then seeking repayment, the UK broker enters into a fresh (and apparently unconnected) transaction in relation to different goods which are purchased from another member state, VAT-free. The goods are then sold on to UK trader two (the ‘contra-trader’) who exports them back to a taxable person in the other member state.
In this variant, the UK broker is able to ‘recoup’ the input tax he paid from the output tax collected on the supply of the new goods to UK trader two/contra-trader. The UK broker has no need to seek any repayment because he has a VAT credit; rather it is UK trader two/contra-trader who submits a repayment claim to the Revenue, confident of receiving payment because the transaction is unconnected with the defaulter chain. If the repayment is made, the loss from the original missing trader crystallises.
