Knowledge of Fraud & Agents

The Eurolaser VAT case is a significant First-tier Tribunal decision addressing the denial of VAT rights under the Kittel and Mecsek principles, and the imposition of penalties.

Eurolaser was assessed by HMRC for denied input and output VAT, and penalties, on the basis that it was involved in supply chains tainted by missing trader intra-community (MTIC) VAT fraud. The central issues were whether Eurolaser, via its self-employed agent Mr Darr, knew or should have known of the fraudulent nature of the transactions, and whether such knowledge could be attributed to the company.

The FTT applied the Kittel principle, which allows HMRC to deny input tax recovery where a taxpayer knew or should have known their transactions were connected with VAT fraud. The Mecsek principle, which allows denial of zero-rating for exports if the supplier knew or should have known of fraud and failed to take every reasonable step to prevent participation, was also considered.

The FTT found that Mr Darr had actual knowledge of the connection to VAT fraud, and that this knowledge was attributable to Eurolaser, following established case law on the attribution of an agent’s knowledge to a company. The FTT also found that Eurolaser had not taken every reasonable step to prevent its participation in the fraud. In particular, the company’s director, Mr Pallister, failed to conduct adequate due diligence on Mr Darr, who had a history of involvement in supply chain fraud and was a disqualified director.

The FTT confirmed that the knowledge of a self-employed agent can be attributed to the company, even if the director is innocent. Under the Mecsek and Litdana principles, a taxpayer can only avoid joint and several liability for VAT fraud if they acted in good faith and took every reasonable step to avoid participation. Eurolaser did not meet this standard.

There are some key reminders in here that business owners cannot outsource key responsibilities.  If you have any concerns about the steps you’re taking in your business, or of your clients, please get in touch with your usual VITA contact.