Dodgy perfume

Goodwin and Unstead were in business selling counterfeit perfume. They were also up-front about what they were doing – at least, they claimed to be. Unstead claimed that “Everything I can carry in my vehicle, everything I trade in and sell, is a complete copy of the real thing. I do not sell goods as the real thing. In fact I sell my goods for a quarter of the original price. I am not out to defraud or con the public. I only appeal to the poseurs in life.”
The real manufacturers might have sued these men for passing off the product of their chemistry experiments in trademarked bottles, but it was Customs who sent them to jail – for failing to register for VAT and pay over the tax on their sales. The amount they should have collected was estimated at £750,000, which shows that they must have shifted a great deal of perfume.
If they had paid the VAT, Customs would have had no problem with them. Their customers must have been reasonably satisfied – if your counterfeit perfume smells something like the real thing, why worry?
They tried to get out of jail with an ingenious argument, similar to Lindi St. Claire’s – if the sale of the perfume was illegal, surely there shouldn’t be VAT on it. It wasn’t legitimate business activity, so it wasn’t something that ought to be taxable.
The European Court had no time for this. They pointed out that it would give lawbreakers an advantage over lawful businesses – they wouldn’t have to charge VAT. The judges suggested that maybe people would even deliberately break the law so they could get out of tax – in this case, the only thing that made the trade illegal was treading on someone’s trademark rights, and that was something that might happen at any time in legitimate businesses.
The judges said that VAT would apply to any trade which competed in a legal marketplace, even if the particular sales broke the law for some reason. Counterfeit perfume is VATable because real perfume is too. They then went on – unwisely, in my view – to give examples of what would really be too illegal to charge VAT on. They said that there is no lawful market in counterfeit money or in restricted narcotic drugs, so these are genuinely outside the scope of VAT.
Of course, Customs have traditionally had two main roles – looking for drug smugglers, and dealing with VAT-registered traders. They have generally treated both with much the same suspicion, but the European Court made it clear in this case that the two sets of customers are completely separate.