Pictured above: L to R: Mark Kenkre (Challinors), Jonathan Lennon (Barrister at 23 Essex Street Chambers, London) and Arun Chauhan (Challinors)

Fraud and Asset Recovery lawyers from Midlands law firm Challinors have said suspected VAT 'missing trader' fraud activity rose fifty percent in the first quarter of 2009, when speaking at the firms' specialist VAT Fraud event in Birmingham last week.

"The Office for National Statistics has reported this rise in missing trader, or MTIC, fraud," said Arun Chauhan, joint head of Challinors Fraud & Asset Recovery department. "Fraud has grown so fast that ten percent of UK exports are now attributed to criminal activity which may involve no goods actually being exported at all. The quantity of fraud is now more than five times higher than a year ago.

"This is distorting trade figures particularly total recorded exports which stood at £59.5 billion in the January to March 2009 period," he said. 

VAT fraud mainly focuses on Missing Trader Fraud. It centres on the assessment of payment for goods or services attracting input tax and the subsequent onward supply or sale of goods or services where output tax may, or may not, be charged. Fraud investigations arise following the detection of a series of transactions where a taxable individual incurs higher input tax than those set-off by output tax, which leads to a reclaim of the difference from HMRC.

Challinors' Mark Kenkre added: "In 2006, HMRC developed a system called 'extended verification' which is applied to certain repayment claims and works to deny payment of any VAT repayment claim if it exceeds a certain amount, if it was in a certain sector - such as mobile phones or computer chips - or the trader had a connection with an MTIC fraud or individual involved in carousel fraud.

"Several traders have challenged HMRC and the extended verification procedure in the Courts, the most recent involving Livewire Telecoms Limited. Livewire won its appeal against HMRC and the decision of the VAT Tribunal that it should pay all the £2.2 million of VAT withheld under extended verification. The Court ruled that a legitimate trade in a 'clean chain' could not have known of a future fraudulent transaction in a connected 'dirty chain'.

"In May, the trader in the Blue Sphere Global Limited case was also successful in obtaining an order that HMRC repay nearly £1.5 million in VAT withheld by HMRC.

"These decisions could have huge significance to VAT fraud and extended verification," says Mark. "HMRC will now have to prove that the trader knew or ought to have known of the fraud rather than the onus being on the trader."

"MTIC fraud is not the only area of concern. Sham transactions are just one aspect of VAT fraud investigated by HMRC," explained Arun. "A sham is seen where an act or documents do not create legal rights and obligations which they give the appearance of creating. Whilst there is a general view that all individuals involved know it is a sham, this isn't always the case. HMRC will investigate if they are suspicious of tax being reclaimed by a taxable individual who has purchased goods, paid input tax, and then sold-on the goods - probably abroad - and as such, not recharged the output tax, but who is reclaiming the difference.

"This can present problems for innocent taxable parties in uncommercial transactions who may be scrutinised and reclaims withheld on the basis of HMRCs suspicion, as was the situation in a recent case involving Plasma Trading Limited."

The event's guest speaker Jonathan Lennon, a barrister at 23 Essex Street Chambers in London and specialist in serious financial fraud, examined a number of recent cases involving organised carousel VAT fraud. 

Challinors has offices in Birmingham, West Bromwich, Wolverhampton and Nottingham. The firm has 23 partners and over 100 fee earners, and is ranked as one of the top legal firms in the West Midlands, being Number 1 in the Chambers UK Directory in a number of categories.