£4m Input Tax disallowance due to supply chain concerns
In the Court of Appeal decision in Davis & Dann Ltd and Precis (1080) Ltd HMRC’s view was agreed with and the court decided that the taxpayers should have known that their trades in “grey market” involving Gillette razor blades were connected with fraud.
The case was in respect of HMRC disallowing more than £4 million in input VAT claimed by the taxpayers and that the evidence relating to these deals indicated that the only credible explanation for them was that they were connected with fraud and that the taxpayers should have known that.
The decision suggests that businesses need to take a cautious approach to all about transactions, even where they appear to be ‘normal’, if there is the slightest indication that might suggest some link to fraud. Davis & Dann Ltd and Precis case report.
More generally, HMRC explain that missing trader fraud, also known as Missing Trader Intra-Community (MTIC) fraud, is the abuse of the VAT rules on cross-border transactions within the EU. It relies on the fact that no VAT is chargeable on these transactions.
HMRC go on to explain the situation in a typical VAT supply chain where there is no fraud a VAT-registered business which buys and sells goods charges VAT to customers (called output tax) and is charged VAT by suppliers (called input tax). The business can reclaim the VAT it has paid and so it passes to HMRC the net VAT it collects (output tax less input tax) or reclaims from HMRC any excess input tax.
MTIC fraud was originally mainly evident in sectors such as IT and mobile phones. However, the criminals have moved onto other asset classes such as precious metals, power, gas and carbon emissions allowances and telecoms; and as criminals become ever more sophisticated there is no doubt they will find other areas to exploit.
Businesses need to be aware that HMRC frequently try to recover lost tax by denying input tax recovery from 'innocent' businesses in the supply chain. MTIC fraud is therefore a concern for legitimate businesses and it would be prudent for all businesses to carry out due diligence on their supply chain and customers to minimise the risk of exposure to such fraud.