The HMRC First-tier Tribunal has heard many appeals which involve carousel fraud, and generally HMRC win. So how can practitioners protect themselves from getting caught up in this kind of fraud, and how can they help their clients?
Liability for carousel fraud is an important matter because apparently ‘innocent’ persons can be significantly affected. Some persons have engaged in transactions, which arguably were ‘too good to be true’ and concerned people of whom they have little knowledge. Thus, in the eyes of some, they are not innocent.
Spotting potential fraud
HMRC have a guide on the official website entitled How to spot missing trader fraud
This indicates that practitioners should be suspicious if a business shows any of the following characteristics:
- newly established or recently incorporated companies with no financial or trading history;
- contacts have a poor knowledge of the market and products;
- unsolicited approaches from organisations offering an easy profit on high-value/volume deals for no apparent risk;
- repeat deals at the same or lower prices and a small or consistent profit;
- instructions to make payments to third parties or offshore;
- unsecured loan with unrealistic interest rates or terms;
- instructions to pay less than the full price (and often even less than the VAT invoiced) to the supplier;
- established companies that have recently been bought by new owners, who have no previous involvement in the sector;
- new companies managed by individuals with no prior knowledge of the product, who hire specialists from within the sector; or
- entities trading from residential or short-term leased accommodation and serviced offices.
Similar examples of checks to help establish the integrity of a supply chain are also in HMRC’s Notice 726 and include the following:
- What is your customer’s/supplier’s history in the trade?
- Have a buyer and seller contacted you within a short space of time with offers to buy or sell goods of the same specifications and quantity?
- Has your supplier referred you to a customer, who is willing to buy goods of the same quantity and specifications being offered by the supplier?
- Does your supplier offer deals that carry no commercial risk for you, e.g. with no requirement to pay for goods until payment has been received from the customer?
- Do deals with your customer or supplier involve consistent or pre-determined profit margins, irrespective of the date, quantities or specifications of the specified goods traded?
- Does your supplier (or another business in the transaction chain) require you to make third-party payments or payments to an offshore bank account?
- Are normal commercial arrangements in place for the financing of the goods?
- Are the goods adequately insured?
- Are high-value deals offered with no formal contractual arrangements?
- Are high-value deals offered by a newly established supplier with minimal trading history or a low credit rating?
- Can a new business obtain specified goods cheaper than a long established one?
- Have HMRC specifically notified you that previous deals involving your supplier had been traced to a VAT fraud?
- Have HMRC specifically notified you that HMRC date stamps have been present on goods offered for sale by your supplier, or that there is evidence of HMRC date stamps being removed from packaging? This suggests that the goods had been subject to carousel movement, which should alert you to a significant risk that the transactions entered into with that supplier may be connected with fraud.
- Have HMRC specifically notified you that other carousel fraud characteristics (such as third party payments) have occurred in transaction chains involving your supplier?
- Consider the commercial viability of the transaction, for example Is there a market for this type of goods, such as superseded or outdated items or non-UK specific models
(a) Do the goods exist?
(b) What research have you done to test whether these goods are available as described and in the quantities being offered?
(c) Is it commercially viable for the price of the goods to increase within the short duration of the supply chain?
(d) Have normal commercial practices been adopted in negotiating prices?
(e) Is there a commercial reason for any third party payments?
(f) Are normal commercial arrangements in place for the financing of the goods?
Consider the viability of the goods as described by your supplier, for example:
(a) Do the goods exist?
(b) Have they been previously supplied to you?
(c) Are they in good condition?
(d) Do the quantities of the goods concerned appear credible?
(e) Do the goods have UK specifications, yet are to be exported from the UK?
(f) What recourse is there if the goods are not as described?
- Obtain copies of certificates of incorporation and VAT registration.
- Verify VAT registration details with HMRC.
- Obtain letters of introduction on headed paper.
- Obtain some trade reference, either written or verbal.
- Obtain credit checks or other background checks from an independent third party.
- Insist on personal contact with a senior officer of the prospective supplier, if possible making an initial visit to their premises.
- Obtain the prospective supplier’s bank details, to check whether:
(a) payment is due to a third party; and
(b) as regards imports, the supplier and its bank share the same country of residence.
- Check details provided against other sources, e.g. website, letterheads and BT landline records.
- Retain not only VAT invoices but also purchase orders, pro-forma invoices, delivery notes or airway bills, allocation notification, and inspection reports.
Carrying out the above checks is not quick and easy. However, the tribunals and courts may consider the due diligence carried out on suppliers and customers to see whether there was a genuine attempt to avoid becoming involved in transactions that are connected to carousel fraud or whether any checking was a mere ‘smoke-screen’.
The recent case of Carbondesk Group plc  TC 04550, concerned the disputed recovery of input tax of £95,484,820 for a period of only two months. HMRC contended that transactions entered into by Carbondesk were linked to the evasion of VAT concerning carousel fraud and transactions in carbon credits (emissions allowances).
The assessing officer considered that the extent and quality of Carbondesk’s due diligence on its suppliers when it obtained supplies from them was relevant to the issue as to whether it knew or should have known of the fact that these transactions were connected with fraud. Unless she had the evidence of the due diligence that Carbondesk had carried out on the suppliers, she would be unable in the exercise of her best judgment to make an assessment. She had to be satisfied on the objective evidence that Carbondesk knew or should have known of the connection to fraud.
The FTT noted that HMRC had visited Carbondesk on 14 July 2009 and warned of the potential for fraud.
The FTT held that it was clear from the officer’s evidence that the reason for asking for further material was to see whether there had been a change of approach from what she had found to be an unsatisfactory process before 14 July 2009 and her conclusion that there had not been a change was a factor she relied on in deciding on actual knowledge of fraud.
The FTT held that it was not perverse or wholly unreasonable for the officer to investigate whether a different approach was taken regarding due diligence after those warnings. If extensive enhancements had been made, then that could be a factor indicating that Carbondesk took the question of fraud seriously and casting doubt on whether it knew that its previous transactions were connected to fraud. If it had continued to trade without taking a different approach, then that could indicate that its due diligence was mere ‘window dressing’.
Carousel fraud ‘mutates’, like a virus, as the criminals seek to avoid being stopped. Thus, the above checks are a mere guide, but the following are key ‘Red Flags’ regarding suspicious business transactions:
- the price is significantly higher or lower than usual;
- the buyer or seller provided little information about himself;
- the method of payment is in cash, through a third party or in another country; or
- the invoice vaguely describes the goods or services.
Stan Dencher BCom (Hons) FCA CTA (Fellow) AIIT is a Specialist Tax Writer with CCH.
This article originally featured in CCH Tax News which is a weekly, online news service that covers important developments in both direct and indirect taxation. The service allows you to keep up to date with the rapidly changing world of tax. For more information visit www.cch.co.uk/cch-tax-news.