Author: Nicola Sharp
25 April 2023
3 min read
Nicola Sharp of Rahman Ravelli outlines a case where an individual’s knowledge of a tax evasion scheme was key.
A cellphone company director lost his bid to challenge a £1.7 million-plus award against him for VAT fraud when the High Court said he had actual knowledge of his firm's tax evasion scheme.
In Bhatia v Purkiss  EWHC 775, the High Court rejected an appeal from Deepak Bhatia, the company director of the now-defunct phone company JD Group Ltd, against a ruling from the Insolvency and Companies Court (ICC).
In the ICC ruling, Judge Agnello QC had held that Mr Bhatia had acted dishonestly and that his conduct was proof of his knowledge of the VAT (value added tax) fraud scheme. It was further held that he had breached his fiduciary duty under section 212 of the Insolvency Act 1986 (the Act). Section 212 of the Act enables an insolvency practitioner to issue legal proceedings for compensation from company officers of the insolvent company to address misfeasance and breaches of duty by the directors.
The case involved a Missing Trader Intra Community (MTIC) VAT fraud scheme, a highly complex form of tax fraud. Europol states that MTIC fraud is the most common type of VAT fraud and is costing revenue authorities around EUR 50 billion annually in tax losses. The company in question was involved in several importing and exporting transactions involving mobile phones.
In his High Court judgment, Sir Anthony Mann paraphrased the Court of Appeal case of Natwest Markets plc v Bilta (UK) Ltd  EWCA Civ 680, which explained the mechanics of such fraud schemes:
The criminals involved in MTIC fraud exploit the fact that imports and exports of goods between member states of the European Union (EU) are VAT-free. A trader (the defaulter) imports goods from State A into State B, and sells them on within State B. No VAT would be payable on the goods when imported, but the onward sale (and any sales further down the chain within State B) would attract a liability to VAT until such time as the goods are exported to another member state (which could be State A or another state). The final link in the chain will be the person who exports the goods, who is often an accomplice of the defaulter. The intervening sales and purchases are known as “buffer transactions”. ‘
Sir Anthony Mann agreed with the ICC that Bhatia had actual knowledge of his business' scheme to evade the VAT, even though he may not have known every detail or all the precise mechanics of how it would be carried out. He also agreed with the ICC judge that Bhatia had acted dishonestly in 12 transactions involving cellphone sales on which the company failed to pay the VAT and that the legal test in Ivey v Genting Casinos  AC 391 had been correctly applied. In addition, Sir Anthony Mann agreed with the finding that Bhatia was in breach of his fiduciary duty under section 212 of the Insolvency Act 1986.
He stated: "He may well not have known the identity of the supplier companies from which the payments were diverted ... or that the law would categorise that conduct as a breach of fiduciary duty.
“But that degree of knowledge is unnecessary provided he was aware of the general nature of the scheme and its implications."
He added that the ICC judge had not been obliged to "find absolutely every fact which might be capable of going to the assessment" of a dishonest attempt to evade or divert VAT in order to find Bhatia liable.
The High Court also rejected Bhatia's objection to the amount the ICC had ordered him to pay. Bhatia had argued that the calculations were flawed because Judge Agnello made the assessment based on a scenario in which "the whole of the company's mobile phone business was illegitimate". Bhatia said the calculation of damages should have been based only on the 12 transactions found to be fraudulent.
Sir Anthony Mann did find that one particular sentence in the ICC judgement could have been misconstrued. But he concluded that the judge’s assessment of damages under section 212 of the Act was correct. Sir Anthony Mann did, however, agree with Bhatia’s argument that the ICC judge was wrong to include insurance premiums in the total damages bill. The High Court judge said the parties could agree on a slightly reduced damages figure that removed the element of insurance premiums from the original sum.
This case provides further clarification as to how the courts will apply the dishonesty test and determine the subjective standard of knowledge in matters relating to fraudulent behaviour. The High Court confirmed here that Mr Bhatia did not have to know every detail of the transactions and that the element of “knowledge includes blind eye knowledge”.
Unless the director of a company can prove that he took every precaution which could reasonably be required of him to ensure that his transactions were not connected to fraud, then he can be found to have defrauded HM Revenue and Customs of VAT.
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.