April 05, 2022


I wanted to mention a recent case where the non-payment of VAT due to HMRC, in order to keep a company afloat, was seen as dishonest. There was no attempt to either engage with HMRC to explain the problems faced, or to try to reach an agreement over time to pay.

The Tribunal was asked to consider whether HMRC was entitled to disallow input tax claims of c. £268,000 made by a building company (“GC”) in respect of supplies made to it by an associated company (“GH”.) This is on the basis that GC knew that GH had not paid, and was unlikely to ever pay, the VAT charged to HMRC.

HMRC’s position was that the VAT was not claimable because either: -

  1. GC had exercised the right to deduct for fraudulent or abusive ends; or
  2. transactions were connected with the fraudulent evasion of VAT and GC knew or should have known that this was the case.

This provision is normally used in cases of deliberate, structured VAT fraud (commonly known as “Missing Trader”, or “Carousel” fraud.)

Here, the Tribunal accepted there was no co-ordinated plan to avoid VAT, and the structure was set up for good commercial reasons, (to ring fence contracts with subcontractors against employment status claims by those sub-contractors.) GH engaged the sub-contractors and recharged their services to GC, plus a management fee to cover its costs. GC then charged the end customer for building services.

Unfortunately, several of GC’s contracts with its customers were subject to disputes, and GC was continually short of cash. It was not able to pay the full amounts, including VAT, to GH. GH in turn applied what cash it had to paying its contractors, and not to paying HMRC. According to Counsel for HMRC, one of the Directors had even described this policy as “robbing Peter (i.e. HMRC) to pay Paul (i.e. contractors)”.

The Tribunal accepted that IF all the disputes were resolved, GC would have paid all outstanding sums to GH which would then have been in a position to pay HMRC. However, on the evidence, the Tribunal decided that it was very unlikely that GH would be able to pay the VAT due to HMRC in any reasonable time period.

Eventually, GH entered creditors’ voluntary liquidation (HMRC did not assert that the liquidation was part of any plan to avoid VAT or other tax liabilities) at which point it had debts of £1,684 to trade creditors and £318,755 to HMRC.

The Tribunal decided that as the businesses were under common control, GC knew that it was claiming input VAT that was unlikely to be paid over to HMRC by GH. Further, neither GC nor GH took “the open and honest course of contacting HMRC to explain the problems faced.”

It is clear that the Tribunal was not impressed by the evidence given by the Directors, one of whom was described as displaying evasiveness and dissembling; and another repeatedly said that he could not remember when asked direct questions.

On this basis, GC’s conduct was dishonest, and it lost any entitlement to reclaim input VAT on the supplies made to it by GH.


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