Companies that fail to perform careful due diligence checks on their trading partners expose themselves to the risk of becoming unwittingly embroiled in tax fraud. In one case, a telecommunications services company came perilously close to paying a multi-million-pound price for such a failure.
HM Revenue and Customs (HMRC) alleged that the company knew or should have known that large transactions it entered into with two suppliers over a period of four quarters were connected to the fraudulent evasion of VAT. On that basis, HMRC denied the company’s claims to deduct input tax totalling more than £19 million.
Ruling on the company’s challenge to that decision, the First-tier Tribunal (FTT) noted that it was aware that there was a problem with VAT fraud in its sector. There were features of the transactions that should have put it on alert. The due diligence it carried out in respect of the relevant suppliers was clearly lacking. It could have been more thorough and asked more questions.
In allowing the appeal, however, the FTT noted that criticism of the company’s due diligence procedures was made with the benefit of 20/20 hindsight. It was at the time in the midst of a chaotic restructuring exercise. Overall, HMRC had failed to establish on the balance of probabilities that the company either knew or ought to have known that the transactions were connected to fraud.
Case notes:
PTGI-ICS Limited v The Commissioners for Her Majesty’s Revenue and Customs. Case Number: TC/2017/02223