MTIC Investigations and Appeals

You need to read this if HMRC have decided to deny your company the right to deduct input tax (VAT) because you knew or should have known of a connection to fraud (the Kittel principal), or they are investigating your procedures and supply chains. There are 3 types of general situations that require
the services of specialist MTIC advisors:

1. HMRC’s MTIC or Fraud Teams are asking questions about your trading and have requested
   commercial documents and due diligence material on your suppliers and customers.
2. HMRC are withholding a VAT repayment claim and have formally stated that they have begun
   the process of ‘extended verification’.
3. HMRC have concluded their enquiry and have either raised a VAT Assessment, refused to
   repay VAT due to you, or both.

We deal below with final decisions that need to be appealed to the Tax Tribunal, but there are possibilities to prevent such a final decision being made in the first place.

It is vital to seek advice before engaging with HMRC in an MTIC situation. Mistakes are often made in correspondence and conversations with Officers or found in the documents provided to HMRC. These mistakes can be very damaging and are sometimes terminal to a later appeal.

Refrain from attending meetings or answering continuous questions through correspondence. Instead, show full cooperation by presenting HMRC with a full report into your trading together with all relevant commercial and due diligence documentation.

Having been involved in over 100 MTIC appeals at various stages, we are fully aware of every possible allegation that could be raised by Officers in a final decision. It is vital to address each point prior to that decision by way of a full report.

MTIC Statutory Review

Once HMRC have decided to deny input tax, it is virtually impossible to have that overturned on a Statutory Review, i.e. a review by an independent Officer. The process that Officers go through to reach a decision means that a review cannot change matters. The decision-making Officer will have
already sought agreement with his Team Leader, Solicitors Office and the Policy Team before denying input tax. It is, therefore, highly unlikely that a Review Officer will overturn the decision and we have not come across this in over 100 MTIC appeals.

However, we have success in stopping the decision in the first place by providing substantial evidence to the standard that would be presented to Tribunal. That evidence, in effect, shows HMRC that they are unlikely to be successful at Tribunal.

Rarely do HMRC withdraw after a Tribunal appeal has been lodged and their Policy is to simply allow a Tribunal to decide the outcome. However, the HMRC policy is to decide whether they have a greater than 50% chance of success before a decision is reached.

Increase your chances of success at Tribunal

There are 3 principals that need to be followed in order to be successful in an MTIC Tribunal appeal:

1. Do not ignore a single HMRC allegation, no matter how insignificant you believe that point
   to be.
2. Where HMRC say a particular pattern of trading (such as back to back trading) is indicative
   of fraud, or they say that a lack of insurance is an indicator of knowledge of the fraud, you
   must supply evidence to show that these factors are present in non-fraud transactions.
3. Ensure you have a legal team that has experience in winning, and fully assist them in the
   process.

Do you need a specialist tax barrister (counsel)?

Many companies are unable to fund counsel to assist but this should not deter you. CTM has, on 3 occasions, succeeded in large MTIC Tribunal appeals without counsel. However, if a legal team is instructed without counsel, a complex and lengthy hearing will be run by one person. Counsel does
not just bring along their expertise, but they bring along assistance at the hearing.

HMRC often attend such hearings with 2 barristers, a Solicitor, a caseworker and a member from their Policy Team. It is certainly not terminal to your case if you do not have a barrister, but it does increase the chances of success. Having said that, we continue to represent traders without counsel and look forward to more success going forward.

Fees

Specialist Counsel’s fees for a one-week hearing would be in the region of £35,000+VAT. You do not need a QC, you need a skilled tax barrister, such as David Bedenham. Our fees depend mainly on the number of witnesses, the number of trading partners and the number of transactions. For cases that
we believe are very strong, we are often prepared to offer a reduced fee in return for a payment upfront. On very rare occasions we offer a no win no fee.

Know your Judge

It is important to ask the Tribunal who the Judge will be for the final hearing. You can then read previous judgments to understand what the Judge likes and, very importantly, what the Judge doesn’t like and adapt your case as necessary.

Cross Examination

The best cases can be won or lost during the cross-examination of witnesses. Directors and other witnesses need to be fully prepared and undergo a rigorous questioning period in order to be ready to be cross-examined by HMRC’s MTIC barristers. Directors who do not put in the time to fully prepare
for this are often made to look inconsistent and unreliable when cross-examined by a good barrister. We also advise that you review court transcripts from previous hearings to understand the types of questions that will be faced.

Important parts from previous Judgements

The higher courts have ruled that, simply because there was a very high risk of a connection to fraud, this does not mean that HMRC will succeed. In the appeal of Mobilx Limited, the Court of Appeal stated:

“If HMRC was right and it was sufficient to show that the trader should have known that he was running a risk that his purchase was connected with fraud, the principle of legal certainty would, in my view, be infringed. A trader who knows or could have known no more than that there was a risk of fraud will find it difficult to gauge the extent of the risk; nor will he be able to foresee whether the circumstances are such that it will be asserted against him that the risk of fraud was so great that he should not have entered into the transaction. In short, he will not be in a position to know before he enters into the transaction that, if he does so, he will not be entitled to deduct input VAT. The principle of legal certainty will be infringed.”

In other words, it matters not how much risk there was, risk is not enough for HMRC to succeed.

What do HMRC Need to Prove?

Again, we look to Mobilx for the lead authority in both tests:

‘Should have known’ test – The Court of Appeal stated:

“If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel.”

What this means is that, if normal commercial arrangements were not in place and there was no other reasonable explanation for the supplies other than fraud, it will be found that you should have known.

A Tribunal can look at all the facts, including payments terms, large quantities of goods from a supplier new to the industry, poor description of goods, lack of contracts etc. Of course, all the above are also normal in industries not connected to fraud and so a detailed defence is required to counter the
arguments. You would simply need to show that the way in which you traded was not so unusual as to only point to fraud.

‘Actual knowledge’ test – This is simply a look at the facts again and seeing if a trader must have known it was fraud. It is not everything, but if you focus on how you behaved then you won’t be far off. If you made bank transfers yourself that were uncommercial, or generally traded in a very dubious
fashion, then a Tribunal is likely to find that you actually knew of the fraud.

Personal Penalties

HMRC’s policy is to raise personal penalties against any trader who knew or should have known of the connection to fraud. That means they can do so if a trader loses an appeal or simply doesn’t appeal a decision to deny input tax.

Those penalties are substantial and have previously amounted to millions of pounds and certain bankruptcy for some traders. New legislation enables HMRC to issue a maximum 30% penalty whether you knew or just should have known of the fraud. That is 30% of the VAT at issue.

There is also no means to appeal a personal penalty without successfully winning an appeal of the HMRC decision to deny input tax.

Are Legal Fees refunded on Success?

Legal fees will only be refunded if the appeal is categorised as ‘complex’ by the Tribunal and that depends on the amount and how complex the issues are. In a straight forward MTIC appeal under, say, £1million, the appeal is generally not complex and the winning party does not recover costs. However, even in complex cases, a trader can elect to opt out of the costs regime and no party gets its costs; it is solely a matter for the trader.

For more information, please contact Liban Ahmed (Director) on 07738 666548 / liban@ctmlaw.co.uk. He has substantial experience prosecuting MTIC fraud within HMRC and over 12 years’ experience defending MTIC appeals in the private sector.