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HMRC internal manual

VAT Fraud

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HM Revenue & Customs
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Contrivance: The way the taxable person trades: Payments and credit

How payments are treated by the various parties to the transaction can indicate whether that transaction is credible (VATF33000) and, if not, contrived.

Aspects to consider include:

  • What are the payment terms?
  • Are the payments made in accordance with those terms?
  • Has payment been made / received?
  • What action has been taken to recover non-payments?
  • What is the timing of the payments in relation to the supply?

Third party payments and offshore bank accounts for UK to UK supplies are examples in Notice 726 of indicators that could alert the taxable person to the fact that his transactions were ‘connected with fraudulent evasion of VAT’.

In some cases transaction payments are often received from the customer before the taxable person pays his supplier. This scenario raises questions regarding:

  • the credit worthiness of the taxable persons in the chain of transactions (if it has supplied goods to another body without payment it is effectively providing credit);
  • the level of due diligence and risk assessment undertaken (VATF70000);
  • possibly the need for insurance to protect both the final exporter/dispatcher and other taxable persons further up/down the chain (VATF64200); and
  • how the supply has been funded (VATF62600).

Some tribunals have concluded that suppliers would not normally commit themselves to supply consignments of goods without near certainty that they would get paid, and similarly wouldn’t commit themselves to such purchases without near certainty that the supplier could deliver. In its decision in Calltell Telecom Ltd & Opto Telelinks (Europe) Ltd (VAT Tribunal reference 20266) the tribunal stated:

  1. A trader in a legitimate market trading in goods worth millions of pounds would not deal with others without first satisfying himself that his suppliers could supply what they contracted to supply, and that his purchasers could pay for what they had agreed to purchase. It is not enough, in our judgment, to contend that goods would not be paid for until they had been inspected, nor handed over until paid for. In a genuine market, traders dependent, as the Appellants were, on payment by their purchasers in order that they could themselves pay their suppliers would not commit themselves to a purchase without near certainty that the purchaser would pay, and would not commit themselves to a sale without near certainty that their own supplier was in a position to deliver. Here, neither their due diligence nor their contractual conditions provided the Appellants with any true assurance that, assuming they were genuine, arm’s length deals, they would be honoured by their counterparties. Instead, they were exposed to the risk that they would be left with goods for which their purchasers could not pay, or that they would be unable to fulfil orders from their customers.