VAT fraud – ignorance is no defence
VAT fraud is a highly complex form of tax fraud that relies on the abuse of VAT rules for cross-border transactions. VAT fraudsters generate billions of euros in profits by avoiding the payment of VAT, or by fraudulently claiming repayments of VAT from national authorities.
The most common form of VAT fraud is Missing Trader Intra-Community (MTIC) fraud. The basic MTIC fraud model involves organised, sophisticated activities that seek to exploit differences in how VAT is treated in the different EU Member States. The criminals create a structure of linked companies and individuals across these states in order to abuse both national and international trading and revenue-accounting procedures.
The crime takes advantage of legislation that allows trading across Member State borders to be VAT free: VAT is applied only to sales within a Member State at the applicable domestic rate. This enables traders to import goods without accounting right away for the VAT. Any VAT charged on sales should be declared and paid to the Member State’s revenue authority. In some MTIC cases, fraudsters sell the goods and charge the VAT to buyers without remitting the value to the tax authorities.
Ignorance is no defence
As a business, if you ‘knew or should have known’ that your transaction, or a linked transaction, involved fraud, then HMRC may refuse your VAT claim. In determining whether you ‘knew or should have known’ HMRC will consider all the circumstances relating to the transaction, including whether you took reasonable steps to verify the integrity of your supply chain – ignorance is not a defence.
This position was re-confirmed in a Court of Appeal decision at the end of February 2020 in the case of Aria Technology Limited v The Commissioners for Her Majesty’s Revenue & Customs. The Court of Appeal dismissed Aria Technology Limited’s (“ATL”) efforts to squeeze out of a £300,000 tax bill after HMRC found £750,000 of the firm’s input tax was not creditable. The Court of Appeal also ordered ATL to pay HRMC’s legal costs and refused permission to appeal to the Supreme Court. The ruling marks the third consecutive loss in court for ATL over its attempts to avoid paying its full VAT bill.
ATL was allowed to appeal against an earlier judicial ruling that it took part in a VAT carousel fraud on one legal ground: that two, 2008 letters from an HMRC official setting out the tax bill, as well as ATL’s options to appeal against the case, did not, legally, count as a formal ‘assessment’ of tax due. The Court of Appeal disagreed, stating that “a notification of an assessment can be contained simply in a letter”.
The sole shareholder and director of ATL; Aria Taheri, has always denied that his company took part in fraud and/or that he personally knew or ought to have known of the fraud. It is unclear whether ATL will exercise its right to apply for permission to appeal directly to the Supreme Court.
How can you avoid becoming caught up in missing trader fraud?
It is in your interests to carefully check who you are dealing with. It is good commercial practice for businesses to carry out checks to establish the creditability and legitimacy of their customers and suppliers. Some business sectors such as the energy sector and related commodities, which are subject to frequent price fluctuations, are more likely to be vulnerable to fraud and other criminality and may need more extensive checks.
Impact of Brexit
Having left the EU, the risk of MTIC fraud being carried out in the UK is likely to reduce. In practice, it is likely to drive the fraud elsewhere in the EU rather than reduce overall levels of MTIC fraud. However, as the government seeks to generate overseas trade and investment with possible changes in VAT and tax incentive policies, HMRC will no doubt keep a close eye on this area for signs of similar fraudulent activity.
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We have expertise in complex high-value tax disputes including direct tax litigation, VAT and MTIC fraud disputes. Most recently, we acted for W Resources an AIM-listed mining company, in its successful VAT appeal in relation to whether the supply of management services to two subsidiaries constituted an economic activity. We have also settled a number of similar disputes for other AIM-listed companies. If you need assistance in relation to any VAT or other tax dispute please get in touch.