Taxing times with VAT fraud cases

Guise: Recent judgements could make life tricky for resellers

The never-ending battle that is Missing Trader Intra-Community (MTIC) or ‘carousel fraud’ litigation has taken on a kind of monotonous inevitability ­ moving forward, and then backtracking.

The Tribunal’s May decision on Blue Sphere recognised that traders doing business in one part of the sales chain may not be aware of fraudsters operating in another part of the chain.

The judge attacked the way Her Majesty’s Revenue and Customs (HMRC) had presented its case, arguing that Blue Sphere ought to have known of
the connection to fraudulent transactions through the fraudster Infinity — which was trading several trades removed and after Blue Sphere’s trade had been completed.

It was this unrealistic approach that appears to have swayed the judge against HMRC. This was based on whether there was knowledge of the connection and knowledge that the connection involved fraudulent evasion of VAT.

The judge took the view that, while Blue Sphere would have known that its transactions would be connected with traders later down the track, that alone was not enough to establish that Blue Sphere knew or ought to have known that those other, subsequent transactions involved VAT fraud.

The judge held that the Tribunal was wrong to say that Blue Sphere’s due diligence ­ and failure to follow up where it should have — was not sufficient to protect it from the risk of involvement in transactions that might turn out to be undesirable.

This was the wrong test. It is not whether such transactions ‘might turn out’ to be undesirable but whether Blue Sphere ought to have known it was participating in VAT fraud.

Might this prove a victory for common sense? However, at this stage the decision is being appealed by HMRC.

Customs have begun to look more closely at the operating methods adopted by traders. Merely paying lip service to fraud prevention steps such as due diligence will be used as evidence of participation in VAT fraud.

Typical arguments now being used by Customs were reviewed in the more recent October judgment, in the Red 12 Trading case. In this instance, there were no records of any of the reportedly extensive emails and telephone calls leading to each of 46
deals entered into by Red 12, and their trading patterns made no commercial sense.

Red 12’s terms of business were inconsistent with its trading practices. Furthermore, in 21 of the 46 deals, inspection reports were dated more than a day after the deal date.

Also, much of the stock had two-pin Europe-style chargers, although they were being imported for UK sale where three-pin chargers are of course needed. No customer ever rejected one of these phones, and Red 12 did not take down any phone International Mobile Equipment Identity (IMEI) numbers. Its accountant’s advice to do so had
been rejected.

Unsurprisingly, Red 12 lost its claim to repayment in the High Court. More recently still, on 6 November, there was the Megtian case, where Lewison, J. held that a company left penniless after a repayment claim had been refused should nevertheless pay £40,000 to cover costs if HMRC won.

I do not know how the defences to such claims for security were received as at the time of writing the case had still not been fully reported.

A third-party funder, a director of Megtian, may have been involved, which could have ramifications for all third-party funders in MTIC litigation.

Another word about the covert inspection activities of HMRC: in one recent case our client was shocked to discover that out of the three lorries in her convoy, Customs found two that were empty and one had been filled with shredded paper.

The solution? Make sure your internal procedures are water-tight. If you’re at all uncertain, make sure you seek pre-deal advice.

Tony N Guise is a partner in specialist VAT advice firm Guise Solicitors