VAT fraud – who has to prove what?
A taxpayer company has recently won a case where it was accused of knowingly being involved in a VAT fraud. The VAT tribunal had previously determined that the due diligence exercise carried out by the company was insufficient to protect it from risk of involvement in fraud.
The company was a distributor of computer equipment and entered into a number of transactions selling mobile phones in April 2006. The company accounted for the transactions in its VAT return and sought repayment of input tax.
HMRC refused the claim on the grounds that the transactions had been part of a scheme to defraud HMRC and that the taxpayer should have known that this was the case.
The taxpayer appealed, claiming that it had no means of knowledge of any fraud. The VAT tribunal decided that the company should have realised by its purchases that it had been participating in transactions connected with the fraudulent evasion of VAT. The appeal was dismissed.
The taxpayer appealed to the High Court which held that the test adopted by the tribunal had been too high. It was also misleading as the burden was on HMRC to prove that the taxpayer should have known by its purchases that it had been participating in fraud.
The knowledge that the taxpayer needed to have was that it had been taking part in transactions that had been connected with fraud. That the transactions might be connected was not enough. When the taxpayer entered into the deals, it could not have known about any missing traders.
The taxpayer’s appeal was allowed.