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Naïve VAT Fraud Dupe Pays £1.4 Million Price

HMRC2A company that was innocently caught up in one of the rash of missing trader intra-community (MTIC) frauds that infected the electronics export/import trade has been denied a £1.4 million VAT deduction after the Fist-tier Tribunal ruled that it ‘should have known’ it was being used by crooks.

The company had at one time turned over more than £100 million annually as the authorised dealer for a number of well-known electronics manufacturers. However, it was brought low by a series of nine wholesale transactions it entered into in which thousands of mobile phones and other electronic goods were traded.

HM Revenue and Customs (HMRC) argued that the transactions were connected to MTIC fraud and refused the company an input tax deduction of £1,418,900 on the basis that it either knew, or should have known, that that was the case. It was said that the company should have been aware that the trades were ‘too good to be true’ and HMRC pointed to the coincidence that the profits made by all the participants, added together, equalled the VAT reclaimed.

The company pleaded that it had been ‘used by sophisticated fraudsters and was unknowingly inserted into a number of chains to crystallise the fraud’.  The deals had appeared to be legitimate and profitable and were ostensibly no different from previous trades that it had undertaken.

The company’s secretary and 50 per cent shareholder had given ‘full and frank evidence’ but the Tribunal found that he was ‘a somewhat naïve businessman whose ambition was, above all else, to close deals and make a profit’. Despite being fully aware of the prevalence of MTIC fraud in the industry, he had appeared unconcerned by the ‘improbable coincidences’ that characterised the transactions.

The Tribunal accepted that the company had not knowingly been engaged in fraud. However, in dismissing its appeal, the Tribunal noted that it had failed to carry out checks on the credibility or creditworthiness of trading partners. In the circumstances, the Tribunal concluded that the company should have realised that MTIC fraud ‘was the only reasonable explanation’ for the transactions.