Fraud and Asset Recovery lawyers from Midlands law firm Challinors said, at a specialist VAT Fraud event in Birmingham, that suspected VAT ‘missing trader’ fraud activity rose by half in the first quarter of 2009.
“The Office for National Statistics has reported this rise in missing trader, or MTIC, fraud,” Arun Chauhan, joint head of Challinors fraud and asset recovery department, said. “Fraud has grown so fast that ten per cent of UK exports are now attributed to criminal activity which may involve no goods actually being exported at all. The quantity of fraud is now more than five times higher than a year ago.
“This is distorting trade figures particularly total recorded exports which stood at £59.5 billion in the January to March 2009 period.”
VAT fraud mainly focuses on ‘missing trader fraud’. It centres on the assessment of payment for goods or services attracting input tax and the subsequent onward supply or sale of goods or services where output tax may, or may not, be charged. Fraud investigations arise following the detection of a series of transactions where a taxable individual incurs higher input tax than those set-off by output tax, which leads to a reclaim of the difference from HMRC.
Challinors’ Mark Kenkre said: “In 2006, HMRC developed a system called ‘extended verification’ which is applied to certain repayment claims and works to deny payment of any VAT repayment claim if it exceeds a certain amount, if it was in a certain sector – such as mobile phones or computer chips – or the trader had a connection with an MTIC fraud or individual involved in carousel fraud.
“Several traders have challenged HMRC and the extended verification procedure in the courts, the most recent involving Livewire Telecoms Limited. Livewire won its appeal against HMRC and the decision of the VAT Tribunal that it should pay all the £2.2 million of VAT withheld under extended verification. The court ruled that a legitimate trade in a ‘clean chain’ could not have known of a future fraudulent transaction in a connected ‘dirty chain’.
“In May, the trader in the Blue Sphere Global Limited case was also successful in obtaining an order that HMRC repay nearly £1.5 million in VAT withheld by HMRC.”