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HMRC internal manual

VAT Fraud

HM Revenue & Customs
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Contrivance: Contractual position: Insurance

Where the transactions involve the sale of a large quantity of high value goods it would usually be expected that the taxable person would purchase some form of insurance, in case the goods are lost, stolen or damaged. Goods such as mobile phones are high value and low weight/volume, making them notoriously vulnerable to theft.

In cases where the trader has taken out insurance, or is covered by the freight forwarder it may be relevant to consider how the insurance cover interacts with the transfer of title. In the case of back to back deals it might be difficult to understand at what point the insurance cover would apply as there is often uncertainty over when ownership of the goods changes. This may raise questions on the validity of the trader’s insurance cover. This is a point highlighted by the tribunal in its decision in the joined case of MBC Trading Ltd and Kingston Components Ltd (VAT Tribunal Reference TC00310):

 31(3)(c)(xiv). Mr White and Mr Peters both claimed to have adequate insurance for the goods, but, given that according to the documents neither company had ownership of the goods until the supplier was paid, and since they did not pay for the goods until after they themselves were paid and the goods were shipped out, it is highly unlikely that either company’s policy would cover the goods in the event of loss. 

Aspects to consider include:

  • Who is responsible for insuring the goods, both whilst they are in the warehouse and during physical delivery to the customer?
  • Have the insurance premiums been paid?
  • What is the value of the insurance coverage when seen against the value of the goods?
  • What is and is not covered by the insurance policy?
  • Have the conditions of the policy been met?

The above list is not exhaustive.

If insurance was in place, it will need to be determined whether the terms were adhered to by either party and, if not, what was done to correct that position. It will also need to be determined whether the actual terms made commercial sense, for example release of title, ownership etc.