Fraud or No Fraud
In a significant victory, Deos Group.co.uk Ltd have successfully appealed against HMRC’s denial of input tax and a related penalty assessment. The FTT ruled in favour of the company, which had been accused of participating in transactions connected to VAT fraud where it should have known.
Deos, a small enterprise who had historically traded in office equipment before moving into wholesale consumer electronics, had input tax disallowed on 18 purchases by HMRC. The tax authority claimed these transactions were linked to fraudulent activity.
In this case, the judge used the "should have known" test, which is a legal standard used in VAT fraud cases to determine whether a taxpayer can reclaim input tax. It means that even if the taxpayer did not actually know about the fraud, HMRC can assess them if it is deemed they ought to have known, based on the circumstances, that their transactions were connected to VAT fraud. The test is objective, not subjective.
With this test in mind the Tribunal judge considered several key factors in reaching the decision to allow the appeal in favour of the business:
Nature of the Business and Transactions: The judge acknowledged that Deos was a small business that had transitioned from selling office equipment to wholesale consumer electronics. This context was important in assessing the scale and nature of the transactions under scrutiny.
Due Diligence and Commercial Conduct: The Tribunal examined whether Deos had taken reasonable steps to verify its suppliers and the legitimacy of the transactions. Evidence showed that Deos had conducted checks and maintained documentation, which supported the view that it acted in good faith.
Link to VAT Fraud: HMRC argued that the 18 transactions were connected to VAT fraud and that Deos either knew or should have known about this. However, the judge found that the transactions had a plausible commercial explanation and were not inherently suspicious in a way that would alert a reasonable trader to fraud.
Burden of Proof: The Tribunal emphasized that the burden was on HMRC to prove that Deos knew or should have known about the fraudulent connection. The judge concluded that HMRC had not met this burden.
In summary, the judge focused on commercial plausibility, the adequacy of due diligence, and the absence of clear indicators of fraud. The ruling reinforces the principle that businesses should not be penalised for fraud in the supply chain unless there is clear evidence of knowledge or wilful blindness.