VAT & Supply Chain Fraud

The First-tier Tribunal's decision in Pacific Computers Ltd is a further illustration of the evidential scrutiny applied in missing trader intra-community fraud cases and the difficulty of sustaining a defence based on ignorance of fraudulent connections within a supply chain.

It was agreed that PCL's transactions were connected to a fraudulent tax loss. The question before the Tribunal was whether PCL knew, or should have known, of that connection - the legal test that HMRC must satisfy to deny input tax recovery. PCL's position was that its directors were innocent participants who had been manipulated into the scheme without awareness of its fraudulent character.

The Tribunal rejected that position comprehensively. On the facts, it found that the director primarily responsible for the trading arrangements, Mr Roach, had actual knowledge of the connection to fraud. The transactions were not entered into naively; the evidence pointed to arrangements that had been structured for fraudulent purposes. The Tribunal went further, finding that even absent actual knowledge, the circumstances were such that PCL should have known - the characteristics of the supply chain, the presence of grey-market goods, and the uncommercial features of the transactions collectively provided sufficient notice.

The decision reinforces several principles that practitioners advising in this area should keep in mind:

• The knowledge of a company's directors is attributed to the company, and the Tribunal will examine their conduct and commercial rationale in detail.

• Due diligence must go beyond basic verification. A trader needs to demonstrate that it has critically assessed its counterparties, questioned uncommercial terms, and engaged substantively with the risks its supply chain presents.

• HMRC's published guidance on indicators of fraud, including Notice 726, provides the benchmark against which that conduct will be measured. Falling short of it, particularly where red flags were present and ignored, will make a defence of ignorance very difficult to maintain.

VITA advises businesses and their representatives on input tax disputes and MTIC-related assessments. If you are dealing with a supply chain fraud enquiry or denial of input tax, contact us to discuss.

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