Missing Trader's Fraud and Personal Liability Notices.

26th March 2019 Business Crime

What is Missing Trader fraud?

MTIC (Missing Trader Intra Community) fraud is nothing new in this country. In short, this fraud is perpetrated by one or more parties to a transactional chain who default on their VAT payments to HMRC. The narrative below describes a simple fraudulent MTIC transaction.

1. Discussions begin between Belgian company and English company 1 about a possible sale of goods. English company 1 does its homework on Belgian company and carries out detailed due diligence on the company and its directors. This includes checking details of the company and its directors on Companies House, carrying out full and detailed background checks on the directors, trading history of the company, obtaining proof of bank account, obtaining VAT account details and statement and some other checks. English company 1 is satisfied as to the bona fides of Belgian company and is therefore happy to begin trading.

2. Belgian company sells a consignment of goods to English company 1 for £1million. As the sale involves two EU member states, it is considered an -intra community- transaction so no VAT is payable by English company.

3. English company 2 contacts English company 1 about purchasing stock. English company 1 is happy to sell the consignment it had previously bought from Belgian company. English company 2 carries out no meaningful due diligence on English company 1 save for confirming the company exists on Companies House and obtaining the company VAT number. English company 2 is happy to trade.

4. English company 1 sells the consignment onto English company 2 with a slight profit margin of 10%. As this transaction is carried out by 2 parties that are both based domestically, England and Wales VAT laws apply and so 20% VAT is added to the invoice by English company 1. Therefore, the total payable by English company 2 is £1,320,000, broken down as £1,100,000 sale price and £220,000 VAT. So far so good.

5. English company 1 does not account to HMRC for the £220,000 as it is legally obliged to. Instead, it opts to fraudulently keep the VAT charged and -disappear- without trace.

6. English company 2 makes an input tax claim for the £220,000 VAT it paid to English company 1, but notwithstanding that it was English company 1 who had defaulted, the claim is denied by HMRC after:

a. they became aware of defaulting English company 1 and the fraudulent reasons for the default. They discover that English company 1 has now gone -missing-.

b. they discovered English company 2 could not evidence any or any adequate due diligence that it had carried out on English company 1.

Therefore, English company 2 were adjudged by HMRC to have -known or ought to have known- that they were involved in a fraudulent transactional chain, pursuant to the authority in the case of Axel Kittel v Belgian State (C-439/04).

Due diligence

The critical point in the above transaction is the lack of due diligence carried out by English company 2 on English company 1. Had they performed detailed checks until they were absolutely satisfied as to the legitimacy and legality of English company 1, then they may well have had grounds to appeal HMRC-s decision to refuse the claim for input tax.

As is evident from the above, just carrying out very basic due diligence will not meet the required standard. Only when a company is completely confident with whom they are dealing (and they can show the same with documentary evidence) should they enter into a transaction.

Section 6 of HMRC-s Notice 726 sets out the checks that a company should undertake. The list is extensive but not mandatory. However, in the event that input tax is denied a company must show that it did everything it could to satisfy itself that its trading partners were legitimate and safe.

Personal Liability Notices

Often when a company is refused the right to recover the input tax it had paid out for goods in a transaction, it is left with a hefty VAT bill that it cannot readily meet, especially in the case of small to medium sized businesses. If it cannot meet the VAT payments due, then HMRC may well issue the director(s)( or controlling/executive manager) with a Personal Liability Notice, meaning that the director is personally responsible for paying those costs. This is very common in MTIC cases.

Personal Liability Notices are issued when the fraud or neglect of the director/manager is the main cause for the company-s inability to pay the VAT bill. In the above example, it would be very easy for HMRC to show this, in that it arises from the director-s negligence in failing to carry out proper due diligence.

A director is at liberty to appeal against the PLN but there must be sufficient grounds to do so successfully.

If HMRC refuse your company's claim for input tax, or if you have been served with a Personal Liability Notice, then please do not hesitate to get in touch with me hereby calling  0800 652 5559 or complete our online enquiry form and a member of the team will call you back as soon as possible. 

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Peter Grogan is a Partner and Head of Department located in Manchester in our Business Crime, Regulation & Driving Offences department

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