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When a finding of MTIC-VAT Fraud Imports Dishonesty

Author: Nicola Sharp  21 May 2024
4 min read

The High Court recently looked at the interesting question of whether or not a previous finding of fraud could ‘import’ dishonesty.[1]

In many cases, dishonesty is an essential component to establishing a fraud. However, in this case, the First-tier Tribunal (Tax Chamber) (FTT) was asked to consider a company’s declaration of VAT. It found that the company had been a part of a VAT fraud in the form of an missing trader intra-community (MTIC) scheme. In coming to that decision, the tribunal was at no point asked to make a finding of dishonesty.

Later, the company involved in the MTIC fraud was placed into liquidation. The liquidator then brought an action against the directors of the company (one of whom resigned in 2006). The nature of the liquidator’s claim meant that he had to prove that the remaining sole director (Nizakat Khan) had acted dishonestly. 

Findings of the FTT

The FTT action was brought by the company itself (Phoenix Tech Ltd). The company appealed HMRC’s decision about its alleged misdeclaration of VAT. 

The FTT found that HMRC had established fraudulent tax losses, as part of an orchestrated scheme for the fraudulent evasion of VAT. In relation to Mr Khan, the FTT concluded that he had both the means of knowledge and actual knowledge that the transaction chains were connected to fraud. They rejected his submission that he was an “innocent dupe.”

The findings of the FTT were that Mr Khan knew of the fraud and, indeed, had sought to conceal the true nature of the company’s business from HMRC but they did not make a finding of dishonesty. They were not asked to do so and it was not a necessary ingredient to the decision that they had to make.

What the High Court was asked to decide

In contrast, the High Court action was brought by the liquidator of Phoenix Tech Ltd (Phoenix), who applied for:

  1. Strike out of the defence of Mr Khan, and / or 
  2. Summary judgment of the application made on 24 November 2022. This application was made under s 212 and 213 Insolvency Act 1986, for misfeasance, intention to defraud creditors, and fraudulent trading. (the Main Application)

The liquidator’s claim in the Main Application was that:

  1. The business of Phoenix was carried on with an intent to defraud HMRC or, alternatively, a reckless indifference as to whether HMRC was defrauded;
  2. The respondents, as the company’s directors, knowingly and dishonestly participated in the carrying on of the business with intent to defraud HMRC.
  3. It was a dishonest or, alternatively, a negligent breach of the respondents’ duties as directors of the company to cause or allow it to trade in this manner.

To succeed in this claim, the liquidator had to prove dishonesty on the part of Mr Khan.

Mr Khan admitted that the transactions were part of fraudulent MTIC transaction chains that resulted in loss to HMRC. He accepted that, as a director of the company, he caused the company to enter into these transactions. 

His defence was that he believed that the company was entering into legitimate transactions and he did not know of any scheme to defraud HMRC. He (and the company) were “an unknowing part of a fraudulent transaction chain.”

How to ascertain ‘dishonesty’

The test for dishonesty is set out by the Supreme Court in Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67.

The fact-finding tribunal must –

  1. Ascertain (subjectively) the actual state of the individual’s knowledge or belief as to the facts. It is not an additional requirement that his belief must be reasonable; the question is whether it is genuinely held.
  2. Determine whether his conduct was honest or dishonest. This is an objective standard of ordinary decent people. There is no requirement that the defendant must appreciate that what he has done is, by those standards, dishonest.

The liquidator had to prove that Mr Khan was a dishonest participant in the fraudulent scheme. 

Counsel for Mr Khan relied on an observation in caselaw that knowledge of fraud does not necessarily equate to dishonesty. 

In deciding the matter, Judge Mullen recognised that knowledge of the fraud and dishonesty are separate questions. However, he concluded that “this is a case where knowledge of the fraud imports dishonesty.” 

His reasoning was that Mr Khan knew of the fraud and he was responsible for filing the VAT repayment claim. He was the company’s sole director for most of the company’s life. 

As the sole director, he knew that the transactions were connected to a fraudulent scheme to evade tax, and he knew that he had concealed the company’s intended trade from HMRC. The judge asked “what possible other conclusion can be drawn in this case other than that Mr Khan was dishonest in allowing the company to participate in multiple transactions and submit the input tax claim accordingly?” 

Looking at it objectively, the judge concluded that the conduct was “self-evidently” dishonest.

Comment

Due to the complexity of MTIC VAT frauds, or carousel frauds, it is possible to get caught up in a scheme unknowingly. But as this case shows, pleading ignorance is no defence.

The Government’s measures to combat this fraud place a responsibility on those who might deal with the fraudsters to take reasonable precautions.

If a business knew or should have known that its transaction was connected with fraud then HMRC may refuse the VAT claim in respect of that transaction. In determining whether a business knew or should have known, HMRC will look at whether the directors took reasonable steps to verify the integrity of the supply chain.

HMRC expects companies to make a judgement on the integrity of their own supply chains, and the suppliers, customers, and goods or services within it. 

The Government has published a useful guide on how to spot missing trader fraud. It gives practical advice and some examples of specific checks that businesses should carry out.

If you have been caught up in an MTIC-VAT fraud, you will need expert representation. At Rahman Ravelli, we have experience in these sorts of claims and we can help you with yours. Please get in touch with our specialist lawyers to discuss your case.

Source

  1. Read the decision in full here: Kevin John Hellard v Nizakat Khan & Anor (Re Phoenix Tech Limited) [2024] EWHC 1130 (Ch)
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Nicola Sharp

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Nicola is known for her fraud, civil recovery, arbitration and business crime expertise, her experience of leading the largest financial disputes and multinational investigations and her skills in devising preventative measures and conducting internal investigations for corporates.

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