VAT – MTIC Fraud

Introduction

This case was concerned with Missing Trader Intra-Community (“MTIC”) fraud.

The case report advises that fraud of this kind is often perpetrated by rings. However, once the goods are placed into circulation by the fraudulent or disappearing importer, it is possible for them to come into the hands of innocent traders.

In relation to repayment of VAT from Revenue Authorities, ECJ rulings provide:

• those who deal in goods and reclaim VAT without any knowledge, actual or constructive, that earlier in the chain there has been a default in the payment of VAT are entitled to repayment.
• those who deal in goods when they knew or should have known of VAT fraud at an earlier stage are not entitled to repayment.

The Facts

The taxpayer company Mobilx was incorporated on 16 September 2003. One of its directors had a background in the mobile phone business: he had managed a subsidiary of Carphone Warehouse Limited (CPW); later, he worked part-time, as a consultant, for a company called Sound Solutions Limited. When the taxpayer company was formed, it was intended that it should replace Sound Solutions as the purchaser of CPW's used phones, and develop that business.

As part of its VAT registration, Mobilx requested that it be permitted to make monthly VAT returns. Monthly VAT returns are a concession allowed to assist a trader to obtain quicker repayment and hence increased cashflow. HMRC are reluctant to grant this concession when they suspect that the trader could be dealing in goods on which VAT had not been paid.

Revenue did not immediately grant the application for registration. A meeting was held between Revenue, the taxpayer and the taxpayer's advisor. Following its registration, Mobilx was not granted its requested monthly returns. The taxpayer had a subsequent meeting with Revenue in relation to the issue of monthly returns. After this meeting, Revenue wrote to the taxpayer saying that there were “concerns” about traders in the chains of supply.

In a later meeting Revenue advised the taxpayer that they had investigated the chains of transactions of products which the taxpayer had bought and sold in May and June 2004. There were 24 such chains; in 17 of them a defaulter had been found and there were concerns about four of the remaining chains. The other three were still under investigation. In those circumstances permission to make monthly returns was not granted.

Eventually, after further pressure from the taxpayer, Revenue allowed the request for monthly returns. Revenue continued to investigate the taxpayer's returns.

It was accepted by the taxpayer, that all 85 transactions undertaken by it in the relevant period led back to fraudulent traders. It was not suggested that the taxpayer was in any way knowingly implicated in VAT fraud.

The Issue

The appeal was against the Tribunal's order whereby it dismissed the appeals of the taxpayer against HMRC's refusal to repay input tax claimed by the taxpayer in its returns for April, May and June 2006. The case against the taxpayer was that it should have known that the transactions involved fraudulent traders.

The Decision

The Tribunal had held that it was, or should have been, apparent to the taxpayer, that if it continued to deal in the products as it had been doing, its transactions were more likely than not to be connected with fraud. As a result, the taxpayer had forfeited the right of deduction which it claimed.

The taxpayer had appealed on two grounds:

1. That the Tribunal applied an incorrect test in law;
2. That the Tribunal was not entitled to reach the conclusion that the taxpayer knew or should have known that if it continued to deal in the products, its transactions were more likely than not to be tainted with fraud.

Incorrect test in law

According to the Judge, the manner in which the Tribunal approached the ultimate question was not seriously open to criticism.

Not entitled to reach the conclusion

The Judge could not end see any error in the manner in which the Tribunal approached the question.

In the High Court, the taxpayer's appeal was dismissed on the basis that the taxpayer should have known that all its transactions were more likely than not to be implicated in MTIC fraud. Hence, it was not entitled to VAT input credit that it had claimed.

The basis for the decision was as follows:

• The taxpayer should have realised that all of its chains were likely to lead back to defaulting traders, unless it ceased trading or significantly changed its manner of doing trade;
• There was ample evidence on which to conclude that the taxpayer was aware that the business it was in was one where it was easy to become involved in MTIC fraud. Against this background, the fact that all its transactions were leading back to defaulters should have alerted a “competent company” to the fact that its trade was the result of fraud.
• Traders were expected to verify the integrity of their supply chains; the taxpayer was aware of this. If, despite due diligence on the immediate supplier, chains were being identified as dirty, more drastic action was required. A reasonable and proportionate response by April 2006 at the latest was either radically to alter the method of trading or get out of it altogether. The taxpayer did not do this.
• There was ample evidence to show that the way in which the taxpayer was carrying on its trade was not protecting it from becoming implicated in dirty chains.

Finally, the fact that Revenue had permitted the taxpayer to make monthly returns did not delegate the necessary awareness away from the taxpayer.

The judgment is available online at http://www.bailii.org/ew/cases/EWHC/Ch/2009/133.html.