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MTIC Fraud – A Blind Eye?

Monday, November 21, 2016

HMRC and Border Force team reports an increase of instructions in relation to unpaid Duty and VAT issues. Missing Trader claims still arise and Peter Hastings reports on a recent case which deals with MTIC fraud.

In Davis & Dann Ltd v HMRC EWCA Civ 412, the Court of Appeal (CA) agreed with the First Tier Tax’s decision that Davis & Dann should have known that the only reasonable explanation for a series of transactions in which it participated was that they were connected to VAT fraud.

Consequently, HMRC correctly disallowed a deduction of VAT amounting to over £4m. Davis & Dann a Trader in consumer goods. HMRC advised Davis & Dann of the risks of becoming involved in VAT fraud. HMRC highlighted that VAT fraud can involve large unsolicited transactions in small valuable items, such as razor blades. 

Following an unsolicited fax, Davis & Dann entered into transactions for over 23 million razor blades with a newly established drinks wholesaler, Davis & Dann had not entered into similar sized transactions for razor blades before. Three days later, a Spanish company telephoned and to buy the same quantity of razor blades. The drinks wholesaler extended credit, so that it did not have to pay until it received payment from the Spanish company.

HMRC discovered that these transactions were connected to “acquisition fraud”, which involves the deliberate failure by an earlier participant in the transaction chain to account for VAT.  Following Kittel (C-439/04), HMRC may deny a trader its input VAT deduction on the purchase of goods if it knew, or ought to have known, that its purchaser was connected with VAT fraud.

In Mobilx [2010] STC 1537, the Court of Appeal held that a trader ought to have known of a connection with fraud, if the only reasonable explanation further transactions it entered into was that they were connected with VAT fraud.

The appeal focused on whether or not Davis & Dann ought to have known that its transactions were connected with VAT fraud.  The Court of Appeal held that the Upper Tribunal did not look at the circumstances as a whole when deciding whether Davis & Dann should have known of the VAT fraud.  The Upper Tribunal should have focused on what was ordinary business for Davis & Dann, rather than the market generally, and to have given importance to HMRC’s warnings. It was held that Davis & Dann should have known of the connection to fraud.

Peter adds “Due Diligence must be undertaken and risks assessed. We have seen many similar cases to this. HMRC will pursue innocent parties if they in effect turn a blind eye. This has also been reinforced in Drinks Stop Cash & Carry v HMRC 2016 UKFTT 730 which held that business and accounting records is widely drafted in reg 31 (a) and that due diligence material and statutory records are business records. HMRC had also expressed concerns about the company trading with supply chains involving FTT. It is important that you take heed of any such concerns”.

Peter and his team is currently acting on a large seizure of raw tobacco alongside many other cases with HMRC and Border force including VAT and Duty issues and Investigations and Insolvency Claims.

For more information please contact Peter Hastings on 01603 675639 or e-mail Peter Hastings