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Tax Authorities Must Live With ‘Grey Market’

In a ringing warning to businesses that an unusually good deal can sometimes signal fraud, ‘grey market’ traders who were refused a £4.3 million VAT deduction after being innocently caught up in a sophisticated missing trader fraud have triumphed over the tax authorities at the Upper Tribunal (UT).

The traders, who specialised in fast moving consumer goods, had bought more than 23 million razor blades from a cash-and-carry before selling them on at a good profit. However, it subsequently emerged that the goods had been transferred through a series of ‘buffer’ companies and that a fraudulent trader, who defaulted on VAT, had stood at the top of the transaction chains.

Although not alleging that the traders had been involved in any wrong-doing, Her Majesty’s Revenue and Customs (HMRC) took the view that they ‘should have known’ that the transactions were connected with fraud and refused to reimburse them £4.3 million in VAT that they had paid on the consignments.

Arguing that the transactions were ‘most unusual’ and ‘exceptionally odd’, HMRC insisted that the traders had made insufficient checks on the company from which they bought the goods and should have heeded ‘warning signals’ that there was something under-hand going on.

Those arguments succeeded before the First-Tier Tribunal. However, in allowing the traders’ appeal, the UT found that HMRC had failed to meet the ‘high hurdle’ of proving that underlying fraud was the ‘only reasonable explanation’ for the transactions.

Noting that the grey market is, by definition, populated by traders who are not authorised distributors and who deal outside ordinary distribution chains, the UT observed that it was not enough for HMRC to show that the traders ‘should have had their suspicions’.

Ruling that the razor blade purchases were ‘entirely explicable as ordinary market transactions’, the UT concluded: “HMRC may not be appreciative of the existence of a market that enables those who are intent on fraud to trade goods to that end. On the other hand, there is no reason to penalise innocent traders in that market merely because it offers that facility”.

If you are offered any deal that seems too good to be true, be very wary. We can give you advice on the steps you may need to  take to protect yourself.