BusinessCorporate FinanceCarousel cases: businesses not guilty by association

Carousel cases: businesses not guilty by association

Livewire's victory will fundamentally affect carousel cases

The recent victory for Livewire Telecom Limited in the VAT tribunal has
caused great excitement within the mobile telephone and computer component grey
markets.

And, indeed, among all businesses currently suffering the effects of HM
Revenue & Customs’ policy of ‘extended verification’ of VAT repayment
claims, considered to be linked to fraudulent activity.

Although the decision should not be seen as a ‘green light’ signalling the
inevitable repayment of millions of pounds of VAT, it seems clear that HMRC
staff will be forced to re-examine not only the way in which they prepare and
present these cases, but also the criteria which inform their decision-making
processes.

The tribunal has taken a measured and dispassionate look at HMRC’s ‘means of
knowledge’ argument and has found some of the principal supportive elements to
be deficient.

The salient points are that there is a legitimate grey market in mobile
phones ­ something which HMRC has refused to acknowledge.

Furthermore, the tribunal also refused to accept a number of issues said by
HMRC to indicate fraud, for example, back to back trading, long cited as a
hallmark of fraud, was not considered in any way sinister.

But the aspect of the tribunal decision, which will have the greatest impact,
is that relating to the issue of whether or not the existence of a fraud has, in
fact, been proven.

This may seem to be an obvious and basic requirement. But HMRC has tended to
take the view in missing trader intra-community cases that a general awareness
of fraud in the market proves that a company knew, or had the means of knowing,
about the existence of the specific fraud. They have put up various indicators
which, they say, go towards proving knowledge.

The Livewire decision makes it clear that this ‘broad brush’ approach is not
acceptable.

Any allegation of fraud must be proven, and HMRC must specify precisely who
is alleged to have committed the fraud, when and where the fraud was committed
and how the appellant could have known about the existence and operation of the
specific fraud at the time of the relevant transactions.

HMRC will, doubtlessly, be reluctant to adopt and commit to these principals
­ but if the appellant’s representatives are prepared to be proactive and
persistent in forcing it to focus on these issues, then the benefits can be
considerable.

Don Mavin is managing director of Vantis Tax

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