Mobile phone trader Honeyfone has lost its Tribunal hearing against HM Revenue and Customs (HMRC) over its anti-VAT fraud Extended Verification policy.

The HMRC Extended Verification policy means companies that have made VAT payments, have had the repayments withheld – in some cases for over two years, causing many to cease trading and go out of business.

Hope had been given to the industry by two victories against HMRC by Olympia Technology and Livewire Telecom. In both cases HMRC was ordered to pay back the withheld VAT, but is appealing both decisions.

Honeyfone, which was set up in 2001 and is currently not trading, was awaiting a VAT repayment from HMRC of around £5m, and took its appeal to tribunal, after HMRC argued that the firm was aware it was involved in fraudulent trading.

Unfortunately for Honeyfone, the tribunal agreed with HMRC, and ruled that the firm ‘should have known’ it was taking part in a fraudulent IT transaction at the time.

The ruling said: “We believe it is unlikely that the [supply] chains were orchestrated without giving Honeyfone some suspicion that it was being at least nudged into its place in each chain. Honeyfone may have been somewhat careless as to whether there was VAT fraud.

“In our view such a reasonable businessman would not have relied mainly and simply upon trusting his suppliers and would not have had his concerns about the possible existence of fraud abated; he would either have concluded that there was VAT fraud in the chains, or would have made a thorough investigation with the aim of determining whether or not there was fraud in the chain.”

Honeyfone was not available for comment.

However an HMRC representative sent this response from the government body.

“For the vast majority of the transactions under appeal, the VAT Tribunal has upheld HMRC’s view that the company’s input tax claims should be denied as those transactions were connected to MTIC fraud and they knew or should have known of that fraud.

“The European Court of Justice has previously confirmed that this means that the companies must, for the purposes of the principal VAT Directive, be regarded as participants in that fraud. In such a situation the companies aid the perpetrators of the fraud and become their accomplice.

“The Tribunal’s view that the amount of input tax to be denied should equate to the amount of VAT lost from the initial default runs contrary to the VAT Tribunal’s earlier decision in Calltel Telecom Ltd and Opto Telelinks (Europe) Ltd. HMRC is currently reviewing the Honeyfone decision and considering whether to appeal to the High Court against this finding or in respect of the two transactions allowed by the Tribunal.

“HMRC will continue to use all lawful means to oppose theft of taxpayers’ money that would otherwise be used to fund essential public services. “

Fred Howarth, chairman of the Federation of Technological Industries, the industry body which represents mobile phone and components traders said: “This was a very disappointing decision illustrating the inconsistencies of the Tribunal Service."

It is unclear whether Honeyfone will appeal the Tribunal’s decision.