International trading companies are expected to carry out careful due diligence on their clients and suppliers to ensure that they avoid unwitting involvement in tax fraud. However, in relieving a long-established business of multi-million-pound VAT assessments, a tax tribunal found that it did just that.
The case concerned a successful company that had, for 40 years, been involved in the grocery export trade. In raising VAT assessments against the company totalling almost £10 million, HM Revenue and Customs (HMRC) asserted that it had, in the course of a single year, entered into no fewer than 374 transactions that were connected to missing trader intra-community (MTIC) fraud.
HMRC argued that there were numerous factors pointing to a reasonable conclusion that the company knew or should have known that the transactions were connected to fraud. During the relevant period, it was said to have entered into a new line of business that almost doubled its turnover. Although the transactions generated little profit, HMRC contended that it should have been apparent to the company that such a massive increase in sales was too good to be true.
For its part, the company queried why such a reputable and long-established trader would put its very existence at risk for a small increase in profits. The transactions, it asserted, were all straightforward wholesaling deals, consistent with legitimate trading. Low margins on the transactions were said to be explained by the company's desire to enter a potentially lucrative new market.
In upholding the company's appeal against the assessments, the First-tier Tribunal rejected HMRC's case that the due diligence it performed in respect of the transactions was at best inadequate and flawed and at worst merely window-dressing. It acted responsibly in engaging an independent professional firm, recommended by its buying group, to complete due diligence reports.
The company considered those reports and queried the contents of at least one of them. They were, on several occasions, viewed by experienced HMRC officers who seemed satisfied with their contents. No suspicions were highlighted. To the extent that the transactions were connected to MTIC fraud, HMRC had failed to show that the company either knew or should have known that was the case. The company took every reasonable step in its power to prevent participation in tax fraud.