Catch 22 with Missing Trader VAT Fraud?

What to do when a company is compulsory deregistered for VAT and you owe them money

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A company received a letter from the HMRC stating that they have compulsorily deregistered one of their suppliers from VAT, and the letter was from the Fraud Investigations Services at the HMRC.

The company included invoices in the quarter 2 VAT return with input VAT claimed on VAT invoices from the deregistered supplier, as it was submitted prior to the letter being received- one of these invoices is outstanding for payment.

 

During a call with an investigator at the HMRC who 'couldn't advise on specific situations'. He stated if the company were to make payment to the deregistered supplier for a VAT invoice that was issued prior to deregistration, they would need to ensure their due diligence was fully compliant (it is) and they could be sure that the supplier isn't involved in VAT fraud (well the company know the HMRC have deregistered them and the Fraud team wrote to them so obviously they now know the supplier is involved in VAT fraud). They also said the company couldn't pay the supplier the net invoice value as "it is proportionally allocated" and gave the example if you had a £1,200 invoice with £1,000 net and £200 VAT, if you only paid the company £1,000 the HMRC would see that as a £833.00 net payment and £167.00 of VAT to them! 

 

It seems like the company is in a catch 22 - not being able to pay any amount over, as any payment would be deemed to include an element of VAT but also knowing despite full due diligence compliance the HMRC fraud investigation indicates VAT fraud, and they could be liable for the VAT themselves.

 

Surely this can't be a unique situation but there seems to be little online of how businesses should approach this situation - does anyone have any experience or insight into this? 

Replies (14)

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By Wanderer
29th Jul 2022 16:44

No experience or insight but maybe just don't pay them? Supplier is clearly on the way down.

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Ivor Windybottom
By Ivor Windybottom
29th Jul 2022 18:03

Has HMRC given your client a repayment of the quarter 2 VAT on the fraudulent supplier's invoices?

Certainly wouldn't want to pay any money to a supplier once it is suspected they are involved in fraud.

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By Paul Crowley
29th Jul 2022 23:25

Agree both
HMRC clearly want the fraudster taken down, they have given you the nod

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By More unearned luck
30th Jul 2022 17:24

You don't say what advice HMRC's letter gives. Nor what business sector it is in (is a trade susceptible to MTIC fraud?)

I disagree with the above respondents; your client must pay its debts. If it doesn't the supplier or its liquidator will sue your client. Whether the supplier accounts to HMRC for the VAT or not is a matter between it and HMRC. It would be wise for your client not to do business with it again or any related companies.

HMRC may assess your client for the input tax it has reclaimed on the dodgy supplier's invoices (and for a penalty) if HMRC thinks it can prove that your client knew or should have known it was participating in fraud. You will have to wait and see if HMRC take such action. Paying or not the debt makes no difference, your catch-22 doesn't exist.

As it happens there was a FTT decision released this week where, unusually, HMRC failed the 'Kittel test'. https://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j12495/TC...

BTW it's not "the HMRC". "The Her Majesty's..." clearly isn't English. You can call Nelson's flagship at Trafalgar "HMS Victory" or "The Victory" but not "The HMS Victory". Although the definite article isn't wrong if "HMRC" is used adjectively eg "The HMRC guidance" but I think it more natural to say "HMRC's guidance".

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Replying to More unearned luck:
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By Wanderer
31st Jul 2022 04:21

More unearned luck wrote:

I disagree with the above respondents; your client must pay its debts. If it doesn't the supplier or its liquidator will sue your client. Whether the supplier accounts to HMRC for the VAT or not is a matter between it and HMRC.

IANAL but you reckon VAT fraudulently charged is a valid debt owed?
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Replying to Wanderer:
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By More unearned luck
01st Aug 2022 11:08

The VAT hasn't been fraudulently charged. The supplier has supplied goods and invoiced the OP's client, including VAT as at the time the supplier was registered. there is nothing wrong with that. The debt including the VAT element was incurred when the OP's client was unaware of the fraud and also, perhaps, at a time when there was no reason to suspect the fraud. Since 1/6th of any sum paid is the VAT element, you seem to suggest that not even the goods should be paid for.

The fraud is not in charging the VAT but in the non-accounting of it to HMRC, a company, not necessarily the supplier, goes missing owing VAT, hence ~HMRC's name for this fraud, missing trader intra-community fraud.

HMRC tackle this fraud, among others ways no doubt, by denying the right of recovery of input tax by the companies involved with the fraud, including innocent companies conned into taking part and those run by people who take insufficient care over who they do business with.

If the OP's client can make payment then the supplier is probably not the missing trader. The missing trader is probably a different company in the chain of deceit.

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Replying to More unearned luck:
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By Wanderer
01st Aug 2022 11:25

More unearned luck wrote:

The VAT hasn't been fraudulently charged.

And you can state that so categorically based on the brief details we have been supplied with?
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Replying to Wanderer:
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By More unearned luck
01st Aug 2022 14:39

No more than your claim that it is.

You seem to be saying that if a diner suspects the restaurateur of suppressing its takings the diner shouldn't pay for his or her meal.

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Replying to More unearned luck:
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By Wanderer
01st Aug 2022 14:51

But I didn't say that did I? Jason says the invoice is fraudulent & I think I'd respect his advice in this situation.

Don't make silly analogies either.

At the moment the OP's client has the upper hand. They still have the cash. I certainly wouldn't be advising them to carry on making payments in this situation.

Best to wait it out & see what happens.

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Replying to More unearned luck:
By SteveHa
01st Aug 2022 11:08

More unearned luck wrote:

BTW it's not "the HMRC". "The Her Majesty's..." clearly isn't English. You can call Nelson's flagship at Trafalgar "HMS Victory" or "The Victory" but not "The HMS Victory". Although the definite article isn't wrong if "HMRC" is used adjectively eg "The HMRC guidance" but I think it more natural to say "HMRC's guidance".

At last, I'm not the only one that gets irked by this.

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Replying to SteveHa:
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By Hugo Fair
01st Aug 2022 15:18

Likewise ... and it's extremely prevalent.

But for nail-biting excruciation, the one that gets me every time is 'the TPR' ... what the hell do they think the T stands for?

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VAT
By Jason Croke
31st Jul 2022 12:24

HMRC are right in so far as if I issue a legal invoice for £100 + £20 VAT and the customer only pays me £100, then I as the supplier have to treat the £100 as VAT inclusive and I declare £16.67 of that to HMRC (so I lose out).

But this is slightly different, a supplier has issued a fraudulent invoice, the supplier isn't paying anything over to HMRC whether it is £20 as per my example of £16.67

But from the client's perspective, if client just pays the net (£100) then there is no VAT for the client to reclaim because the client hasn't paid any VAT. It does depend on whether joint and several liability rules are in play or not.

It is possible, the sale of certain goods such as mobile phones, brings a joint and several liability to anyone in the chain, so if a supplier is committing fraud and the buyer should have known but kept quiet, then the buyer can be liable for any VAT loss in the chain.

The OP says there is nothing much on the web, there is, but HMRC are not going to give detailed guidance on how they prosecute fraudsters. Start here on J&S liability rules.
https://www.gov.uk/guidance/joint-and-several-liability-for-unpaid-vat-n...

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By Tax Dragon
31st Jul 2022 15:10

No idea on the legals. Or the tax.

So why am I commenting? Because of the maths/logic. (Mine or yours is out.)

PickyPepper wrote:

They also said the company couldn't pay the supplier the net invoice value as "it is proportionally allocated" and gave the example if you had a £1,200 invoice with £1,000 net and £200 VAT, if you only paid the company £1,000 the HMRC would see that as a £833.00 net payment and £167.00 of VAT to them! 

It seems like the company is in a catch 22 - not being able to pay any amount over, as any payment would be deemed to include an element of VAT but also knowing despite full due diligence compliance the HMRC fraud investigation indicates VAT fraud, and they could be liable for the VAT themselves.

Company owes trader say £1,200 including VAT. Wanderer questions whether the VAT element is correctly considered a debt. Say it's not. Company pays £1,000 (which is duly payable?) On the basis it hasn't paid VAT, it doesn't reclaim input tax. HMRC argues (and it is so found) that £166.67 of the payment should be reclassified as VAT. Says company is liable as supplier is missing. Does company have a matching input tax claim so ends up paying nothing to HMRC?

If so, where's the catch? (Let alone 22 of them.)

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paddle steamer
By DJKL
01st Aug 2022 13:28

Obviously a Major Major problem.

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