It is common for VAT fraud schemes to involve one or more contrived transactions and, in extreme circumstances, the whole chain might be contrived. Any fraudulent evasion of VAT may or may not be within the same transaction chain as the VAT claim, depending on whether the scheme involves contra trading (VATF23550).
The benefits of showing that the transactions were contrived are:
- to demonstrate the true nature of the fraud, i.e. that it is an overall scheme with the primary aim of defrauding the revenue;
- to help show that any default is unlikely to be the result of inadvertent business failure, but rather that it occurred deliberately as part of a contrived scheme to defraud the public revenue (VATF53100); and
- with regard to whether the taxable person ‘knew or should have known’ (VATF53400), where we can clearly demonstrate that the transaction chains were contrived this must raise a question as to how the taxable person could be involved in a contrived transaction without being aware of it.
There are a wide range of indicators that may demonstrate contrivance, and examples of these are looked at in the following sections. It should be borne in mind that the indicators are not a definitive list and not every indicator will apply in every situation. The important thing to remember is that each of the indicators, on their own, are not likely to prove that the taxable person ‘knew or should have known’ of the connection with fraud. You will need to take account of all of the indicators, together with any other unusual features of the transactions, to determine whether or not the transactions were subject to normal commercial conditions and practices, or alternatively whether they appear to have been contrived.
A contrived scheme suggests that the taxable person ‘must have known’ what was going on. There must then be a question as to how a taxable person would be able to participate in contrived transaction chains without knowing that they were doing so. The answer to that question obviously depends on all of the evidence, particularly in relation to the taxable person’s behaviour.
As observed by the High Court in its judgement in the case of Calltel Telecoms Ltd and another ( EWHC 1081 (Ch)):
- It will be recalled that the rationale in Kittel for refusing repayment where the purchaser knows that he was taking part in a transaction connected with fraudulent evasion of VAT was that he “aids the perpetrators of the fraud and becomes their accomplice”. For my part I have no difficulty in seeing how the purchaser who is not in privity of contract with the importer aids the perpetrators of the fraud. He supplies liquidity into the supply chain, both rewarding the perpetrator of the fraud for the specific chain in question, and ensuring that the supply chains remain in place for future transactions. By being ready, despite knowledge of the evasion of VAT, to make purchases, the purchaser makes himself an accomplice in that evasion.