HMRC has contended for five years that the entire grey market in mobile phones exists only to facilitate fraud.
It has denied the very existence of a grey market for mobile phones at various times in its pursuit of VAT fraud. During the appeal, HMRC was forced to admit a legitimate grey market exists. The Tribunal said: “We have found as a fact how the grey market arises… about which we see nothing suspicious.”
The Tribunal also said mobile phones imported to the UK from Central Europe should not be considered fraudulent – HMRC had also argued the import of mobiles with a Central European specification into the UK was itself an indicator of fraud. The Tribunal was critical of this general approach to the detection of fraud too.
Even more generally, HMRC has argued in the past knowledge of the mere existence of missing trader fraud in the market can be used to support an allegation a trader had ‘means of knowledge’ of fraud in their own supply chain.
Following this case, such an argument no longer holds.
Martin O’Neill of Vantis Tax said: “We were able to argue that HMRC was required to prove that a company such as Livewire had specific knowledge of the particular fraud which it was alleged had occurred in its supply chain.”
The burden of proof, suggested the Tribunal, must be more fully on HMRC in future cases. Cogent evidence is necessary for it to prove ‘means of knowledge’ of VAT fraud.
O’Neill said: “HMRC will need to be in possession of hard evidence in future to support, in full, an allegation that a series of transactions constitutes a scheme to defraud.”
Also, HMRC has used failings in traders’ due diligence to support allegations a trader had ‘means of knowledge’ of fraud. But traders and their legal representatives have repeatedly argued allegations by HMRC of ineffectual due diligence have depended on facts only known to HMRC itself.
In the Livewire case, HMRC even claimed Livewire’s use of the First Curucao International Bank (FCIB) for its offshore banking was an example of insufficient due diligence and, therefore, knowledge of VAT fraud.
But the Tribunal said that, because fraud investigations into the FCIB by UK and Dutch authorities only came to light after Livewire’s transactions of April 2006, there was no grounds for ‘means of knowledge’ in this circumstance.
O’Neill said: “It is now settled law that HMRC can only disallow a VAT repayment in circumstances where they can prove an allegation of knowledge of fraud.”