Liable for Fraud by Someone Else

How To Avoid Liability For Fraud By Someone Else

Liability For Fraud By Someone Else is a post that considers the circumstance in which an innocent party could have some liabilities flowing from the fraud by somone else.

Can I Really Have A Liability For Fraud By Someone Else?

The answer is yes, you really can have a liability for fraud by somone else.

This is a particular issue where VAT is concerned and particularly when there has been what is known as Missing Trader Fraud.

The question is whether or not you would be able to reclaim VAT on your purchases when you have been a party caught up in a chain of transactions of which some were fraudulent.

What is Missing Trader Fraud?

Missing Trader Fraud typically arises when a group of companies are involved in the fraudulent evasion of VAT.

In a typical chain of transactions a VAT registered business charges VAT to customers (called output VAT) and is charged VAT by suppliers (called input VAT). The business can reclaim the input VAT it has paid and has to account to HMRC for the net VAT it receives.

Missing Trader Fraud historically arose in industries such as mobile phones. In many instances, there was no actual trading taking place but merely a series of companies engaged in paper based transactions that never really happened. In other words, invoices were generated but goods never moved. In the case of mobile phones, it was notorious for there being a warehouse housing such phones but the phones might never physically move from one customer to the other.

Acting In Good Faith Is How To Avoid Liability For Fraud By Someone Else

The starting point is if you could not have known that the transaction into which you have entered was connected to the fraudulent evasion of VAT, then you will usually not lose your ability to reclaim input VAT.

Knew Or Should Know

However, if you knew or should have known that the transaction into which you have entered was connected with the fraudulent evasion of VAT then you are going to struggle.

The wording ‘knew or should know’ seems remarkably similar to the ‘knew or ought to have known’ where Wrongful Trading is concerned in insolvency proceedings.

Critically if you know or should have known that you were involved in a chain of transactions concerning the fraudulent evasion of VAT, then you will not be able to recover the input VAT.

Should Have Known

The recent Tax Tribunal case of Revive Corporation Limited v HM Revenue [2020] UKUT 320 (TCC) (“Revive Corporation”) considered if a company should have known it was involved in transactions connected with the fraudulent evasion of VAT.

HMRC has published VAT Notice 726 which gives you an insight as to the sort of checks you need to consider to try to ensure that you do not fall into the ‘should have known‘ category.

HMRC give two sorts of examples as to when you ought to be suspicious. For example if you have purchased goods at a price lower than the lowest market value or for a price lower than any previous supplier.

How To Avoid Being Liable For Fraudulent Evasion Of VAT

So how can you avoid being liabile for the fraudulent evasion of VAT if you have found yourself caught up in such a Missing Trader Fraud chain?

The answer is that you ought to have undertaken certain checks and due diligence to be able to show that you have been reasonable. HMRC expects you to take reasonable steps to validate the integrity of the people you do business with.

Such checks may involve consideration of the legitimacy of customer and suppliers, the commercial viability of the transactions entered into and the viability of the good supplied.

Notice 726 at Section 6 gives the following examples of checks you should consider:

  • what is your customer’s or supplier’s history in the trade?
  • has a buyer and seller contacted you within a short space of time with offers to buy or sell goods of same specifications and quantity?
  • has your supplier referred you to a customer who is willing to buy goods of the same quantity and specifications being offered by the supplier?
  • does your supplier offer deals that carry no commercial risk for you , for example, no requirement to pay for goods until payment received from customer?
  • do deals with your customer or supplier involve consistent or predetermined profit margins, irrespective of the date, quantities or specifications of the specified goods traded?
  • does your supplier (or another business in the transaction chain) require you to make third party payments or payments to an offshore bank account?
  • are the goods adequately insured?
  • are they high value deals offered with no formal contractual arrangements?
  • are they high value deals offered by a newly established supplier with minimal trading history, low credit rating?
  • can a brand new business obtain specified goods cheaper than a long established one?
  • has HMRC specifically notified you that previous deals involving your supplier had been traced to a VAT loss or had involved carousel movements of goods?
  • has HMRC specifically notified you that HMRC date stamps have been present on goods offered for sale by your supplier, or that there is evidence of HMRC date stamps being removed from packaging, this would strongly suggest that the goods had been subject to carousel movement, which should alert you to a significant risk that the transactions entered into with that supplier may be connected with the non-payment of VAT
  • is there a market for this type of goods, such as superseded or outdated mobile phone models or non-UK specific models?
  • what research have you done to test whether these goods are available as described and in the quantities being offered?
  • is it commercially viable for the price of the goods to increase within the short duration of the supply chain?
  • have normal commercial practices been adopted in negotiating prices?
  • is there a commercial reason for any third party payments?
  • are normal commercial arrangements in place for the financing of the goods?

The above list is not by any means a complete or comprehensive but they a useful guide to the sort of issues that HMRC might be looking to see that you have considered. So update your policies and procedures accordingly!

What Checks Must I Undertake?

There is not a definitive list of checks and procedures for you to undertake to protect yourself from liability of the fraud of someone else and being caught up in it. However, if you do put in place such procedures and document that you have deployed the same properly, this should go a good way to affording you some decent protection.

The above list supplied by HMRC is a series of potential red flags that might be worthy of consideration. However, the Tribunal in the case of Revive Corporation noted that whilst it might be said that the taxpayer, in that case, should have appreciated a risk, it was not necessarily enough to say that it “should have known” that a transaction was connected to VAT fraud.

Disclaimer: How To Avoid Liability For Fraud By Someone Else is a post that is not legal advice and should not be relied upon as such. No liability is accepted for the same which is supplied for information purposes only.