A landmark VAT fraud case has been won by HM Revenue and Customs, protecting as much as £260m of taxpayers’ money.
Legal proceedings in the Fonecomp Ltd case finally concluded after the Supreme Court refused the company permission to appeal. This upholds HMRC’s use of an essential tool in fighting this particular type of VAT fraud.
Ian Stewart, Director, Indirect Tax, said:
“This type of VAT fraud is an organised criminal attack on the public purse with the aim of stealing money away from essential public services and defrauding the law-abiding majority.
“This judgment protects a fundamental weapon in the fight against this fraud. Losing this case would have effectively created a fraudster’s charter.”
This case involved a type of Missing Trader Intra-Community (MTIC) fraud, which at its simplest involves a bogus trade between two companies.The first charges VAT but disappears without paying the VAT to HMRC.The second firm then reclaims the VAT.
In reality, MTIC cases are highly complex and can involve multiple trades between many companies in different countries.
The Fonecomp case involved a type of MTIC fraud known as contra-trading.This involves creating an apparently ‘clean’ chain of transactions to hide the fraud, which is in a connected ‘dirty’ transaction chain.
The company had been involved in trading mobile phones and claimed a VAT refund.HMRC refused on the grounds the company should have known its trading was connected with MTIC fraud.
The Court of Appeal upheld previous rulings that HMRC was correct in using the so-called ‘knowledge test’ in contra-trading cases.
The test refers to a European court ruling that a trader who knew, or should have known, they were taking part in a transaction connected with VAT fraud is regarded as a participant and cannot reclaim its VAT.
The Fonecomp case involved a relatively small sum – about £184,000 – but around 60 cases involving up to £260m in VAT rest on this case.