VAT – MTIC Fraud

Introduction

These appeals are concerned with a form of VAT fraud known generically as missing trader intra-community fraud or MTIC fraud.

The Facts

One of the appellants, Livewire Telecom Ltd was the ultimate exporter of goods in a clean chain. The other, Olympia Technology Ltd was in the ultimate exporter in a dirty chain in relation to most of the exports and the ultimate exporter in a clean chain for three of them.

This case concerns two appeals against decisions of the VAT and Duties Tribunal, which allowed the taxable person's appeal against HMRC. In each case the taxable person had appealed to the Tribunal against the refusal by HMRC to repay input tax reclaimed on an export of goods to another Member State. HMRC appealed to the High Court against the Tribunal's decision.

The Tribunal had found as a fact that the taxable person was not dishonest and had no actual knowledge of such a scheme.

The Issue

On this basis the question of law before the High Court was: in what circumstances may HMRC lawfully refuse to make a payment of input VAT to an exporter who was not himself dishonest and did not have actual knowledge of a scheme to defraud the Revenue.

The Decision

ECJ decisions on this issue were examined in detail, and then applied to the current case: the test is that the taxable person to whom the supply was made knew or should have known that they were participating in a transaction connected with fraudulent evasion of VAT.

The Court dismissed HMRC's appeal in respect of Livewire. The Tribunal did not discuss the legal test of “should have known”. In addition, the Tribunal found as fact “It is worth pointing out that even if the Appellant had conducted perfect due diligence on its suppliers and customers it could not have indicated the fraud by the missing traders in the dirty chain”. This statement was considered fatal to the HMRC appeal as it was found as fact and HMRC could not appeal on a point of fact to the High Court.

The Court allowed HMRC's appeal in the case of Olympia. In applying the correct legal test, the Court's view was that the Tribunal must consider not only the knowledge that should be attributed to the company via its directors, but also the knowledge that should be attributed to the company via its senior employees. On this basis it was held that if the correct legal test had been applied, the outcome of the Tribunal might have been different.

The judgment is available online at http://www.bailii.org/ew/cases/EWHC/Ch/2009/15.html.