Landmark ruling protects £260m in VAT fraud case

A landmark VAT fraud case has been won by HM Revenue and Customs, protecting as much as £260m of taxpayers’ money.

Legal proceedings in the Fonecomp Ltd case finally concluded after the Supreme Court refused the company permission to appeal. This upholds HMRC’s use of an essential tool in fighting this particular type of VAT fraud.

Ian Stewart, Director, Indirect Tax, said:

“This type of VAT fraud is an organised criminal attack on the public purse with the aim of stealing money away from essential public services and defrauding the law-abiding majority.

“This judgment protects a fundamental weapon in the fight against this fraud. Losing this case would have effectively created a fraudster’s charter.”

This case involved a type of Missing Trader Intra-Community (MTIC) fraud, which at its simplest involves a bogus trade between two companies.The first charges VAT but disappears without paying the VAT to HMRC.The second firm then reclaims the VAT.

In reality, MTIC cases are highly complex and can involve multiple trades between many companies in different countries.

The Fonecomp case involved a type of MTIC fraud known as contra-trading.This involves creating an apparently ‘clean’ chain of transactions to hide the fraud, which is in a connected ‘dirty’ transaction chain.

The company had been involved in trading mobile phones and claimed a VAT refund.HMRC refused on the grounds the company should have known its trading was connected with MTIC fraud.

The Court of Appeal upheld previous rulings that HMRC was correct in using the so-called ‘knowledge test’ in contra-trading cases.

The test refers to a European court ruling that a trader who knew, or should have known, they were taking part in a transaction connected with VAT fraud is regarded as a participant and cannot reclaim its VAT.

The Fonecomp case involved a relatively small sum – about £184,000 – but around 60 cases involving up to £260m in VAT rest on this case.

Notes to Editors

1.MTIC fraud is an EU-wide problem and is often connected to organised criminal gangs with links to serious crime including armed robbery, extortion and murder. As well as taking this type of civil action to tackle MTIC fraud, since 2010 HMRC has secured 124 criminal convictions for MTIC fraud with sentences totalling more than 450 years.

2.Fonecomp unsuccessfully appealed to the First-Tier Tribunal, Upper Tribunal and Court of Appeal. The Supreme Court has refused to grant permission for Fonecomp to appeal saying that its application raises no arguable point of law and that the CJEU's existing case law "already provides an answer and the answer is so obvious as to leave no scope for any reasonable doubt”. The legal proceedings are now complete.

3.Follow HMRC Press Office on Twitter @HMRCpressoffice

4.HMRC's Flickr channel: http://www.flickr.com/hmrc.gov.uk