It is a worrying trend that more businesses are unwittingly finding themselves embroiled in this type of fraud.
Recent tribunal cases have highlighted that HMRC are winning more cases against legitimate businesses that in their view have not undertaken the necessary due diligence in relation to their supply chains. This can have severe financial repercussions on a business. You need to be aware of the impact and how you can mitigate the risk by taking some simple steps to protect your business.
Missing trader fraud involves a 'missing' trader who deliberately fails to pay its VAT liability for UK taxable supplies. This fraud is the theft of VAT from the government by exploiting the way VAT is treated within a supply chain where the movement of goods within the chain is outside the scope of UK VAT, often known as a 'tax loss chain'. For example an overseas seller (EU member) supplies goods to a UK 'missing trader' who does not need to pay input VAT to the overseas seller. The missing trader then charges output VAT to the customer but never pays the output VAT to HMRC and then goes missing. The customer assumes the supplier is legitimate and reclaims the input VAT charged by the 'missing trader' and is caught up in a missing trader fraud transaction.
If you are a VAT registered business and HMRC can demonstrate that you knew or should have known that your business transactions were connected to a fraudulent supply chain then HMRC can deny input VAT recovery on those transactions. The government places responsibility on those who deal with the fraudsters. Therefore, it is crucial that your business has processes in place to ensure that you have taken reasonable precautions to avoid transactions with a missing trader.
It is good commercial practice to carry out checks which establish the creditworthiness and legitimacy of potential customers and suppliers. There are some high risk business sectors, such as the electronics/computer component market that are more vulnerable to this type of fraud but we would recommend all businesses review their processes in this respect and implement more extensive checks where appropriate. HMRC will consider specific risks of a particular transaction, the checks made relating to addressing these risks and whether or not the checks were appropriate, adequate and completed in a timely manner. You will also need to demonstrate the results of these checks and what actions have been taken to mitigate the risk.
These checks may include:
Paper work such as purchase orders, delivery note and invoices should be kept to support your view of a high risk transaction legitimacy.
When a business undertakes the checks there may be various indicators that raise alarm bells. For example:
If your checks indicate fraudulent training then you should consider ending your trading relationship with the supplier and you may also wish to anonymously inform HMRC.
If you think this might apply to your business or have any concerns, please do not hesitate to contact us for advice.