Missing Trader intra-community fraud or Carousel Fraud involves organised fraudsters taking advantage of the VAT rule that cross-border transactions are zero-rated for VAT purposes. However, innocent UK companies can be caught up in the fraudsters “carousel” and left with significant tax liabilities owed to HMRC after the organised fraudsters have disappeared. The Government’s measures to combat MTIC fraud places a responsibility on innocent traders to take precautions as they risk heavy financial penalties if they knew or ought to have known about VAT fraud.
Specialist Missing Trader Fraud Solicitors London
We have a huge amount of experience of obtaining decisions from HM Revenue & Customs (HMRC) Officers, seeking Judicial Review where necessary, managing and representing in VAT Assessment appeals and responding to the criminal legal processes that HMRC have deployed in order to combat missing trade intra community fraud in the Mobile, CPU and CO2 industries in which many of our clients operate. Our lawyers have in-depth knowledge of our clients’ industries and have developed a number of expert contacts. We know precisely what expert and other evidence will be required of Appellants to mount a successful appeal and to provide a thorough rebuttal to HMRC’s often completely unfounded accusations as to the Appellant’s knowledge of VAT fraud elsewhere in the supply chain.
The firm is completely unique in bringing together the skill of its Taxation, Civil Litigation and Criminal Defence legal practice groups to provide clients with a tenacious closely managed civil appeal before the Tribunal or criminal defence before the Courts. We provide Appellant legal representation in many high value and complex appeals at the Finance and Tax Tribunals (Tax Chamber) of the new First-Tier Tribunal (formerly the Special and the General Commissioners, and the VAT & Duties Tribunal) and, where appropriate, on appeal to the Upper Tribunal or the Court of Appeal. We also provide Defendant legal representation in the criminal courts in respect of MTIC prosecution by the Revenue and Customs Prosecutions office and associated asset confiscation/forfeiture.
We are able to provide not only our experience but the highest quality of advocacy, cross examination and management of these cases which routinely involve complex facts, expert reports and voluminous paperwork.
What is MTIC Fraud?
Missing trader fraud occurs when a fraudster exploits rules which state that cross-border transactions within the EU are zero-rated for VAT purposes. Carousel fraud is the term used for the continuation of MTIC fraud through a chain of cross-border transactions. In a VAT supply chain where there is no fraud, a VAT-registered business charges VAT to customers when it sells goods (output tax) and will be charged VAT by suppliers when it buys good (input tax). A business can reclaim VAT it has paid and therefore provides HMRC with the net VAT it collects and reclaims any excess input tax from HMRC.
MTIC fraud typically targets high-value, low-weight goods which are easy and inexpensive to transport, such as mobile phones or computer chips. In recent times, other assets such as power, gas, precious metals and carbon emissions allowances have been targeted.
MTIC Fraud Explained
The goods are purchased from a supplier in the EU by a UK Vat-registered company (“Company A”), soon to become the missing trader in the fraud. The goods are correctly zero rated for VAT as an intra- community transaction between two VAT-registered businesses, and are then sold on inclusive of VAT by Company A to another UK trader, Company B. The latter may be an innocent party, or more likely will be part of the fraud fulfilling the role of a “buffer” to conceal the identity of Company A from the VAT authorities. Company B sells the goods inclusive of VAT to another UK trader, Company C who again may be an innocent party or a second line buffer. Company C sells on to Company D who exports the goods from the UK to the original EU supplier, who in turn will sell back to Company A, and so the “carousel” continues until it is identified by Customs.
The transactions may be conducted on a “back to back” basis between the various dealers, with the goods remaining in a third party warehouse after first entry into the UK. The goods will often be sold on four or five times within a matter of hours before finally being exported to the original EU supplier. The transactions are high value with correspondingly large sums of VAT being charged in the supply chain, and hence the attraction to fraudsters.
Company A is the essential ingredient in MTIC frauds, the missing trader, and is set up solely to acquire goods VAT free and sell inclusive of UK VAT, without completing a VAT return and accounting for the VAT received. This VAT represents the financial benefit in such frauds. Company A requires a VAT registration number at the outset, which it may obtain by applying to register a business for VAT, disguising the activities of the business to avoid scrutiny by Customs, or simply by ‘hi-jacking’ another company’s VAT registration number and creating false invoices bearing this number.
On the sale of the goods by Company A to Company B, the fraud usually requires payment to be made by Company B, and in some cases by Company C, to both Company A and the EU supplier. Often the VAT element of the transaction is paid to Company A and the balance to the EU supplier, either to an overseas bank account in its own country or to a bank account in the UK. In due course, Company A, the missing trader, will disappear having achieved its aim of obtaining substantial amounts of VAT on the sale of the goods in the UK, and those behind Company A may re-surface in another form to initiate another carousel, possibly buying from the same EU supplier or a new supplier.
Payments to the EU supplier by Company B are referred to as “third party payments”, although it has been known for fourth and fifth party payments to have taken place in some frauds where Companies C and D make the payments. In some cases, the VAT inclusive price is paid to the EU supplier, thereby immediately removing the VAT evaded from the jurisdiction of the UK authorities.
How are innocent companies affected by MTIC fraud?
Once an MTIC fraud is discovered by HMRC, ordinarily the fraudsters have disappeared leaving behind their VAT registered companies as shells with their assets stripped and their officers absconded. Frequently, innocent companies caught up in the carousel chain are the only ones which HMRC can trace and have any assets which HMRC can target. Directors of innocent companies should take immediate advice from specialist Tax lawyers because typically the strategy employed by HMRC is to transfer the risk of lost VAT to innocent companies.
HMRC’s Prosecution and Civil strategies:
The government confirmed in the Spring 2017 Budget that it will introduce a fixed 30% penalty of potential VAT lost for participating in VAT fraud. The penalty will apply to anyone who has entered into a transaction connected with fraudulent VAT evasion and that person knew or should have known that fraud was involved. This penalty was included as s68 Finance (No.2) Act 2017, which has introduced new sections of s69C-E of the Value Added Tax Act 1994 (VAT 1994). The new legislation has not allowed for reductions of the penalty for cooperation.
The most effective legislation that enables HMRC to address MTIC fraud is to pursue the innocent companies caught up in the carousel. The aim of this is to encourage innocent traders to more carefully question the legitimacy of potential transactions. Although the innocent companies were not part of the creation of the fraudulent scheme in the first place, HMRC can still pursue them for VAT defrauded if they “knew or should have known” that the missing trader fraudster would not pay the VAT due. If HMRC can objectively prove that the innocent company should have known there was fraud involved in the transaction, then they can recover the VAT due by asserting that the innocent company did not have the right to deduct their input tax.
Optigen Ltd and others v Customs and Excise Commissioners (Cases C-354/03, C-355/03 and C-484/03 ) has confirmed that where it can be objectively shown that a trader knew or should have known that by participating in the transaction connected with VAT fraud, HMRC can refuse to allow the trader to deduct input tax unless the trader can show that “he took every precaution which could reasonably be required of him to ensure that his transactions were not connected with fraud”.
In Mobilx (in administration) v HMRC  EWCA Civ 517, the Court of Appeal held that, where a taxpayer knew or should have known that it was party to a transaction connected with MTIC fraud, it lost the right to deduct input tax. This decision further confirmed that the test is a strict one and that if an innocent trader had any way of knowing that a transaction may be fraudulent, then they should have known that it was fraudulent. However, the Court asserted that undue emphasis should not be placed on whether due diligence had been exercised. It was possible that an innocent trader could have asked all the appropriate questions but the circumstances of a transaction should have alerted them that it was potentially fraudulent.
The penalties for those instigating carousel fraud are more severe. On the basis of the current case law, indictments in carousel frauds are usually drafted to include the common law offence of cheating the revenue offence, or conspiracy to cheat under S 1(1) of the Criminal Law Act 1977, where the ‘VAT’ evaded in the fraud is often referred to as ‘monies purporting to be VAT’. Indictments may also include offences relating to converting or removing the proceeds of criminal conduct from the jurisdiction of the UK authorities, contrary to Proceeds of Crime Act 2002 ss 327-329.
In the alternative HMRC have adopted a strategy of withholding monies to the UK Exporter (whom reclaims) thereby forcing that entity to lodge a civil appeal before the VAT and Duties Tribunal (now the First-Tier Tax Tribunal). These appeals are part of the Civil regime however HMRC use leading criminal prosecution barristers to argue their case before the Tribunal.
Our team of Specialist Tax lawyers know precisely what expert and other evidence will be required of Appellants to mount a successful appeal and to provide a thorough rebuttal to HMRC’s often completely unfounded accusations as to the Appellant’s knowledge of VAT fraud elsewhere in the supply chain.
How can companies protect themselves from MTIC fraud?
If companies do not exercise due care initially then HMRC may demonstrate that the company knew or should have known that the trading was linked to fraudulent tax losses. The following signs below are considered red flags by HMRC that you may potentially be dealing with a MTIC fraudster.
- Newly established or recently incorporated companies with no financial or trading history.
- Contacts have a poor knowledge of the market and products.
- Unsolicited approaches from organisations offering an easy profit on high-value/volume deals for no apparent risk.
- Repeat deals at the same or lower prices and small or consistent profit.
- Instructions to make payments to third parties or offshore.
- Individuals with prior history of wholesale trade in ‘high value, low volume’ goods such as computer parts and mobile phones.
- Unsecured loan with unrealistic interest rates and/or terms.
- Instructions to pay less than the full price (and often even less than the VAT invoiced) to the supplier.
- Established companies that have recently been bought by new owners who have no previous involvement in your sector
- New companies managed by individuals with no prior knowledge of the product, who hire specialists from within the sector.
- Entities trading from residential or short-term lease accommodation and serviced offices.
Expert London VAT & MTIC Disputes Lawyers
A large number of companies can get implicated in MTIC carousel fraud. We have the experience and knowledge to assist and defend allegations against our clients in either the civil regime before the courts and the tax tribunals or before the criminal courts. We can also advise our clients on how best to avoid being affixed with constructive notice (the legal concept that a trader should have known) of fraud in the supply chain by having stringent due diligence procedures in place.
Has HMRC made you a part of an extended verification exercise or visited and served you with Notice 726? We have a wealth of experience and are able to provide clear advice to assist you in managing HMRC’s investigation and in improving your Due Diligence process. Our Tax Disputes Solicitors and Barristers are here to help you.