Overview Of Missing Trader Fraud

 

Missing trader fraud involves a ‘missing’ trader who deliberately fails to pay its VAT liability for taxable supplies made in the UK. Those supplies may pass through a number of traders before they are either sold to an end user in the UK or to a customer outside the UK.

It is commonplace that the fraud is done when goods are then sold through a number of UK businesses and finally sold outside the UK free from VAT. The final UK business claims a VAT repayment from HMRC that, if paid, crystallises the loss at the start of the UK supply chain.

The goods that have been and continue to be a key focus in respect of missing trader fraud are mobile telephones, computers and products connected to such equipment.

Joint And Several Liability For VAT Unpaid By Another

 

HMRC published VAT Notice 726 which said that a trader could potentially be liable for unpaid VAT of another VAT registered business:

when you buy or sell specified goods

The aim of this policy would appear to clearly discourage fraud and ensure that traders of certain goods verify the integrity of their trading partners.

A key issue is that if you have managed to secure the supply of goods at a price that is lower than the lowest open market value price or the price you paid was less than that paid on any previous supply of the goods to you then you will need to be able to show that you did not acquire such goods whilst involved in a chain (deliberately or inadvertently) aimed at VAT fraud.

Supply Chain Protection From Missing Trader Fraud

 

The following are matters to consider in respect of the checks that might be required before you a trader enters into transactions that might be considered suspicious where missing trader fraud is concerned:

Legitimacy Of Customers Or Suppliers

For example:

  • 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
  • has HMRC specifically notified you that other Missing Trader VAT fraud characteristics (such as third party payments) have occurred in transaction chains involving your supplier?

Commercial Viability Of The Transaction

For example:

  • 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?

Viability Of The Goods As Described By Your Supplier

For example:

  • do the goods exist?
  • have they been previously supplied to you?
  • are they in good condition and not damaged?
  • do the quantities of the goods concerned appear credible?
  • do the goods have UK specifications yet are to be exported?
  • is your supplier unwilling to provide IMEI or other serial numbers?
  • what recourse is there if the goods are not as described?

To ensure that you do not get caught up in missing trader fraud you will need to make sure that sufficient checks are carried out in each of these categories to make sure that you are not caught in a fraudulent supply chain from the point of view of HMRC.

Checks In Relation To Existing Business Contacts

 

The following are the types of checks that should be considered to be able to show that you are not vulnerable to becoming involved in missing trader fraud with your existing trading partners:

  • obtain copies of certificates of incorporation and VAT registration certificates
  • verify VAT registration details with HMRC
  • obtain signed letters of introduction on headed paper
  • obtain some form of written and signed trade references
  • obtain credit checks or other background checks from an independent third party
  • insist on personal contact with a senior officer of the prospective supplier, making an initial visit to their premises whenever possible
  • obtain the prospective supplier’s bank details, to check whether:
    • payments would be made to a third party
    • in the case of an import, the supplier and their bank shared the same country of residence
  • check details provided against other sources, for example website, letterheads, BT landline records

Relevant Case Law Principles

A recent case of Turquoise 2 Limited v Revenue & Customs  [2021] UKFTT 450 (TC) highlighted the key pieces of case law that set out the principles that are explored in these cases:

Kittel

  1. The rationale for the above approach was set out as follows:

[57] That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice.

[58] In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them.”

Mobilx

“If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met. It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind than carelessness, in the light of the principle in Kittel. A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises.”

“[59] The test in Kittel is simple and should not be over-refined, it embraces not only those who know of the connection but those who “should have known”. Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel.

[60] The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.”

  1. At [61] Moses LJ said the following about legal certainty:

“A trader who decides to participate in a transaction connected to fraudulent evasion, despite knowledge of that connection, is making an informed choice; he knows where he stands and knows before he enters into the transaction that if found out, he will not be entitled to deduct input tax. The extension of that principle to a taxable person who has the means of knowledge but chooses not to deploy it, similarly, does not infringe that principle. If he has the means of knowledge available and chooses not to deploy it he knows that, if found out, he will not be entitled to deduct. If he chooses to ignore obvious inferences from the facts and circumstances in which he has been trading, he will not be entitled to deduct.”

  1. At [64] Moses LJ reiterated that, “[if] it is established that a trader should have known that by his purchase there was no reasonable explanation for the circumstances in which the transaction was undertaken other than that it was connected with fraud then such a trader was directly and knowingly involved in fraudulent evasion of VAT
  2. At [74-75] Moses LJ referred to a tribunal’s “undue focus” on whether a company director had “exercised due diligence or done ‘enough to protect himself’”. Moses LJ then stated: “That is not the only question. The ultimate question is not whether the trader exercised due diligence but rather whether he should have known that the only reasonable explanation for the circumstances in which his transaction took place was that it was connected to fraudulent evasion of VAT.”

“(1) Why was [the taxpayer], a relatively small company with comparatively little history of dealing in mobile phones, approached with offers to buy and sell very substantial quantities of such phones?

(2) How likely in ordinary commercial circumstances would it be for a company in [the taxpayer’s] position to be requested to supply large quantities of particular types of mobile phone and to be able to find without difficulty a supplier able to provide exactly that type and quantity of phone.

(3) Was [the taxpayer’s supplier] already making supplies direct to other EC countries? If so, he could have asked why [the taxpayer’s supplier] was not making supplies direct, rather than selling to UK traders who in turn would sell to such other countries.

(4) Why are various people encouraging [the taxpayer] to become involved in these transactions? What benefit might they be deriving by persuading [the taxpayer] to do so? Why should they be inviting [the taxpayer] to join in when they could do so instead and take the profit for themselves?”

  1. At [83] Moses LJ said that the above “were important questions which may often need to be asked in relation to the issue of the trader’s state of knowledge” and added that he could “do no better” than repeat the words of Christopher Clarke J in Red 12 Trading Limited v HMRC [2010] STC 589:

“[109] Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature e.g. that it is part of a fraudulent scheme. The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and “similar fact” evidence. That is not to alter its character by reference to earlier or later transactions but to discern it.

 [110] To look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial. A sale of 1,000 mobile telephones may be entirely regular, or entirely regular so far as the taxpayer is (or ought to be) aware. If so, the fact that there is fraud somewhere else in the chain cannot disentitle the taxpayer to a return of input tax. The same transaction may be viewed differently if it is the fourth in line of a chain of transactions all of which have identical percentage mark ups, made by a trader who has practically no capital as part of a huge and unexplained turnover with no left over stock, and mirrored by over 40 other similar chains in all of which the taxpayer has participated and in each of which there has been a defaulting trader. A tribunal could legitimately think it unlikely that the fact that all 46 of the transactions in issue can be traced to tax losses to HMRC is a result of innocent coincidence. Similarly, three suspicious involvements may pale into insignificance if the trader has been obviously honest in thousands.

[111] Further in determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them.”

Are you a creditor looking to recover your money?

If you are a creditor of an insolvent company or a bankruptcy, Oliver Elliot can help you address your claim and concerns arising from the insolvency.

Find out how

What Next?

Expert Advice Is Just A Click Away

If you have any questions in relation to What Is Missing Trader Fraud? then contact us as soon as possible for advice. Oliver Elliot offer a fresh approach to insolvency and the liquidation of a company by offering specialist advice and services across a wide range of insolvency procedures.

Our expertise is at your fingertips.

By submitting this form you agree with the storage and handling of your data by Oliver Elliot. For more details, please read our Privacy Policy.

Disclaimer: What Is Missing Trader Fraud?

This page: What Is Missing Trader Fraud? is not legal advice and should not be relied upon as such. This article What Is Missing Trader Fraud? is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.