Recently, HMRC have been more active raising VAT assessments and penalties, which can be transferred to the officers of the company. They have also been actively removing businesses from the register. The pain goes beyond tax, the Insolvency Service has sought to disqualify directors where they ‘ought to have known’.
On 11 January 2021, Laura Theophilus a director of Cis Pay UK, was banned from directing a company for a decade after fraudulently evading VAT amounting to £373,000. Dave Elliott, chief investigator at the Insolvency Service, stated:
“As a company director, Laura Theophilus had a duty to ensure Cis Pay UK paid the correct amount of tax. Despite this, she involved her company with suppliers who she knew, or ought to have known, weren’t following their obligations.“
HMRC had warned Laura Theophilus in April 2017 that several of the Cis Pay UK group’s purchases from a supplier had been linked to tax losses. She was advised to undertake diligence although did not. The director became liable to £373,000 in VAT payments and Cis Pay UK entered voluntary liquidation.
HMRC are applying the Kittel principle more frequently, raising VAT assessments and penalties, which can be transferred to the officers of the company. HMRC are also applying the ‘Ablessio’ principle and removing businesses from the VAT register.
The following examples of indicators that could alert a business to the risk of a connection with missing trader fraud:
Legitimacy of customers or suppliers:
- Know your customer’s/supplier’s history in the trade.
- Being approached by a prospective buyer and seller offering to buy or sell goods with the same specifications and quantity. The approaches would be made close together.
- A supplier referral to a customer wishing to buy goods of the same specifications and quantity as offered by the supplier.
- Supplier terms that carry no commercial risk for the intermediate business, for example no requirement to pay for goods until payment received from purchaser.
- Terms with consistent or pre-determined profit margins, irrespective of the date, quantities or specifications of the goods or services being traded.
- Requests to make payments to third parties or an offshore bank account.
- Goods are not adequately insured.
- High value deals being offered with no formal contractual arrangements.
- High value deals being offered by newly established suppliers with minimal trading history, low credit rating etc.
- Small, newly-established business offering to supply you with goods cheaper than a long-established supplier.
- Has HMRC specifically notified you that previous deals involving your supplier were connected to fraudulent VAT losses.
Viability of the goods as described by your supplier:
- Is it reasonable that the quantity and specification of goods exist?
- What is the condition of goods?
- Why are large quantities of goods with non-UK specifications being offered for supply to you?
- What recourse is there if the goods are not as described?
Most of the examples provided by HMRC relating to legitimacy and viability regard goods. However, HMRC may also apply the same principles to the supply of services/workforce. If a VAT registered person does not take reasonable care and HMRC can demonstrate that person should have known that transactions were connected to missing trader fraud then entitlement to claim the input tax linked to those transaction may be denied.
The Court of Appeal (Mobilx Ltd (In Liquidation) v HMRC  BVC 638) found that if a taxpayer had the means of knowing that, by his purchase, he was participating in a transaction connected with the fraudulent evasion of VAT, the right to deduct was lost.
However, a First Tier Tribunal case (Crow Metals Ltd  TC 07900) last year allowed two appeals against the denial of input tax recovery by HMRC. The transactions were found to be connected with the fraudulent evasion of VAT although HMRC failed to establish the taxpayer should have known that was the case.
The appellant operated as a scrap metal trader processing scrap metal from small merchants and door trade, sorted it and accumulated it for onward sale to larger traders. The transactions in dispute related to 7 different suppliers and 403 purchases. On 22 December 2015 and 23 March 2016, HMRC issued decisions denying input tax based on the Kittel principle.
The parties agreed HMRC had to establish:
- There had been a tax loss;
- The loss resulted from a fraudulent evasion;
- The transactions were connected with that evasion;
- The appellant knew, or should have known, its transactions were connected with the fraudulent evasion of VAT.
The burden of proof for HMRC is high. It is not enough to show:
- A taxpayer had a reasonable suspicion of fraud, or
- It was more likely than not his purchases were connected to fraud.
HMRC must prove that a taxpayer must have known the purchases were connected to fraud. It would be the only reasonable explanation that could be given in the circumstances of the transactions.
In Crowe, the FTT rejected the contention the purported defaulters had to have an intention or plan to defraud at the time of purchases and found the connection could, in principle, arise if the fraud took place after the purchase.
The FTT found that:
- On the balance of probabilities there were tax losses arising from fraud in each case as alleged by HMRC.
- The transactions were connected with that evasion.
- HMRC had not established the appellant should have known its transactions had been connected with fraudulent evasions of tax.
The purchases represented less than 2% of purchases. The transactions were all typical of the general trading carried out. Whilst the appellants due diligence was relaxed, the interactions with the suppliers did not result in the only reasonable explanation being the deals were connected to the fraudulent evasion of VAT.
There is a high burden of proof in such cases and any attempt by HMRC warrants a considered approach to the alleged ‘knowledge’.