HM Revenue & Customs (HMRC) describes missing trader fraud (MTF) as a ‘missing’ or ‘defaulting’ trader who deliberately fails to pay its VAT liability for taxable supplies made in the UK.
Understanding missing trader fraud
MTF can indeed be as simple as a supplier not accounting for the VAT they charge a customer.
This type of fraud involves a trader charging VAT on the sale of goods or services but then disappearing without paying the collected VAT to the Government.
Common scenarios and indicators
In a waste scenario, this could involve a rogue operator accepting waste then invoicing the gate fee including VAT, but not remitting the VAT to HMRC.
The paying party (i.e. the waste operator disposing of the waste) having paid the gate fee including the VAT, would ordinarily reclaim the VAT.
However, if HMRC suspects the paying party ‘knew or should have known’ that the transaction was connected with fraud, they might refuse the VAT claim, meaning that the tax payer was unable to recover the VAT element.
This could have serious consequences for the business and certainly immediate adverse consequences for cash flow, as the input VAT could not be claimed back, but rather would have to be returned to HMRC.
Legal implications and court interpretations
The High Court explored the meaning of “knew or should have known” in the case of Livewire Telecom Ltd and Olympia Technology Ltd, particularly regarding corporate entities.
In these instances, knowledge is not limited to what is known by the taxpayer’s directors but also extends to the knowledge held by senior employees, agents, and advisors who may have conducted or assisted in the transactions.
In this context, ‘knowledge’ encompasses awareness of relevant facts as well as the capacity to assess these facts and draw suitable conclusions from them.
The Court of Appeal added a further spin to ‘knew or should have known’ i.e. if the tax-payer should have known that the only reasonable explanation for the transaction in which they were involved was that it was connected with fraud.
Indicators would include:
- Unsolicited approaches from organisations with little or no history in the market
- Repeat deals at the same or lower price
- Instructions to make payments to third parties or off-shore for less than the full price (and less than the VAT invoices)
- A combination of such features which could lead to the conclusion the transaction was ‘too good to be true’
The tax-payer’s general awareness of such frauds would also be taken into consideration, such as general press coverage, details of warnings given which informed the tax-payer of the risks/ characteristics of such fraud.
HMRC’s stance and guidance
HMRC has issued a guide ‘how to spot missing trader VAT fraud’ and provides examples and indicators that could alert the tax payer to the risk of a connection with a missing trader fraud.
The guide also suggests the type of checks that should be carried out before dealing with an organisation or business.
HMRC will invariably focus on due diligence checks undertaken before deciding whether to refuse a VAT reclaim on the grounds the tax-payer ‘knew or should have known’ of a connection with fraud.
It is therefore essential that the risks are assessed and due diligence undertaken.
The offence of Corporate failure to Prevent the Criminal Facilitation of Tax Evasion under the Criminal Finances Act 2017 (CFA) applies to companies which fail to prevent representatives acting on their behalf from facilitating tax evasion.
Under CFA it would be a defence to prove that the tax-payer had reasonable prevention procedures in place.
Due diligence and compliance
The importance of conducting due diligence checks before engaging in transactions to avoid being implicated in Missing Trader Fraud (MTF) or other offences cannot be overstated.
HMRC will focus on these checks when deciding whether to refuse a VAT reclaim on the grounds that the taxpayer “knew or should have known” of a connection with fraud or bringing a prosecution under CFA.
It is essential to assess risks and undertake due diligence to prevent such issues from arising.
Contact John Dyne today for a consultation to ensure you’re fully protected and compliant with the latest legal standards regarding missing trader fraud.