Phoenix company fraud happens after company goes bankrupt and a second company (known as a phoenix company) is started up overnight with the same directors. Although this is perfectly legal, fraud is committed for example when the directors abuse the phoenix company arrangement and effect a pre-insolvency transfer of assets below market value or fail to account for VAT.
HMRC operate a contrived insolvency team which seeks to identify and prosecute the individuals behind such frauds.
The clothing industry (also known colloquially as the rag trade) is of particular interest to HMRC. In particular the cut, make and trim industry, where sub-contract outworking companies are set up to make up all or part of the garments, often with shadow directors controlling such companies. Rightly or wrongly, HMRC takes the view that many businesses in the rag trade are inherently insolvent from cradle to grave. HMRC allege that these companies are using the VAT received from customers to fund the business overheads, especially wages. HMRC believe that the companies will be unable to pay their VAT liability and will liquidate, with another company already in place ready to take over the work.
Retention of Title arrangements have figured in a number of VAT frauds in the rag trade, whereby the goods pass from manufacturer to wholesale and finally to the retail outlet, all under Retention of Title agreements which allow the goods to be recovered by the supplier when any of the tax authorities attempts to recover lost revenue.
Indictments usually include offences under VAT Act 1994 s 72, and/or a common law offence of cheating the public revenue.
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