Cross-border tax frauds, involving a plethora of shadow companies and convoluted supply chains, are a favourite ruse of organised crime gangs. As a tax tribunal ruling showed, the sheer complexity of such scams can present a daunting challenge to HM Revenue and Customs (HMRC) in even proving their existence.
The case concerned a wholesale commodity trader dealing in high volumes of electronic consumer goods. HMRC denied the company’s claim to VAT zero-rating in respect of 28 consignments of mobile phones sold to an overseas buyer which HMRC alleged was a fraudulent enterprise.
The company entered liquidation after it was assessed for almost £3 million in VAT, also receiving a penalty in excess of £1.7 million on the basis that the relevant VAT returns were inaccurate. HMRC also raised personal liability notices (PLNs) against a director and a senior manager of the company requiring them to pay more than £880,000 each.
Challenging the PLNs before the First-tier Tribunal (FTT), the pair pointed out that the company was intensely busy and involved in upwards of 100 transactions a month. HMRC had challenged only 28 of the 517 deals it had carried out during the relevant period. HMRC did not allege that they had acted dishonestly and they contended that they did not, and could not, have known that the transactions in question were connected to the fraudulent evasion of VAT.
HMRC alleged that the transactions formed part of the overseas buyer’s involvement in a highly complex scheme to defraud the revenue of an EU member state. From a standing start, the buyer was said to have generated total gross sales of over 240 million euros in just six months. The scam was said to have involved an array of traders and essentially fictitious companies ranging across several jurisdictions.
Ruling on the matter, the FTT noted that situations involving potential cross-border fraud are very hard to unravel, particularly where numerous missing traders and buffer companies are engaged to throw tax authorities off the scent. It is in the nature of such frauds that they are designed to be difficult for outsiders to trace.
HMRC had produced evidence indicating the hallmarks of fraud. That included companies without employees or premises starting and ceasing to operate in very short order whilst in the meantime generating vast amounts of turnover. Very long transaction chains were said to have lacked a commercial rationale.
Overturning the PLNs, however, the FTT noted significant evidential gaps in HMRC’s case. Despite a laborious international investigation, it had not managed to piece together the entire chain of allegedly fraudulent transactions. HMRC bore the burden of proof and had not established that there were fraudulent VAT losses connected to the company. Whilst the FTT understood the sense of frustration that HMRC might feel, that could not counteract the shortcomings in its case.