Case Study

MITC fraud - You don’t have to be a fraudster to be affected

1st November 2017

Leading litigation lawyer Julia Lowe is concerned at the growing number of businesses who may be unwittingly falling victim to Missing Trader Intra-community fraud (MTIC), sometime known as Carousel fraud.

“Businesses that fall under the investigation of HMRC and are subsequently deemed to be involved in MTIC fraud will be jointly and severally liable for the tax loss,” explains Julia who is head of Higgs & Sons’ renowned Dispute Resolution team.  “Even if those businesses innocently participated in a deal chain, if they should have realised that there was a fraud being committed, they will be held liable.”

Julia has seen a shift in which industries have been targeted by fraudsters over recent years:

“In the early days of MTIC fraud it was the mobile phones and electronics industries that were affected.  This has broadened out of the years and to affect the drinks industry and more recently,  precious metals.”

 In July 2006, the European Court of Justice held in the cases of Axel Kittel & Recolta Recycling SPRL that

“… a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods”

There have been a number of cases that have followed seeking to interpret the terms “knew” and “should have known”.

Clarification was provided in the case of Mobilix Ltd v HMRC, a decision of the Court of Appeal Lord.   Justice Moses found that:

“The ultimate question is not whether the trader exercised due diligence but rather whether he should have known that the only reasonable explanation for the circumstances in which his transaction took place was that it was connected to fraudulent evasion of VAT.”

More recently the Court of Appeal has given further clarification.  On 29 September 2017 judgment was given in HMRC v E Buyer UK Ltd and Citibank NA.  The long running argument advanced on behalf of taxpayers HMRC must prove dishonesty attracting the same pleading and disclosure requirements for such an allegation where the Civil Procedure Rules apply. 

This is unhelpful for taxpayers as the burden of proving dishonesty in all cases brought in reliance upon the Kittel decision and the greater disclosure of evidence accompanies allegation has been removed.

The Chancellor of the High Court, in his leading judgment set out that:

“The key point, in my judgment, is that, whilst HMRC can, of course, allege that a taxpayer has acted dishonestly and fraudulently in relation to the transactions to which it was a party, they do not need to do so in order to deny that taxpayer the right to reclaim input tax under the Kittel test.”  and further that:

 “In these circumstances, in my judgment, the [Upper Tribunal] was wrong to imply that the [First Tier Tax Tribunal] was justified in undertaking the task of seeking to ascertain from the Statement of Case whether or not the conduct alleged automatically amounted to dishonesty or fraud. Such a process was unnecessary and inappropriate and particularly so when HMRC disavowed an allegation of that character.”

It was held that:

 “It is not relevant for the [First Tier Tax Tribunal] to determine whether the conduct alleged by HMRC might amount to dishonesty or fraud by the taxpayer, unless dishonesty or fraud is expressly alleged by HMRC against the taxpayer. If it is, then that dishonesty or fraud must be pleaded, particularised and proved in the same way as it would have to be in civil proceedings in the High Court.”

Julia Lowe concludes:

“If your business operates in a sector that may be susceptible to MTIC fraud, we can provide specialist support and advice to ensure that you are not unwittingly caught out. 

“HMRC has long issued guidance for businesses which can be accessed from its website.  We can help you interpret that guidance for your business and can assist you from the point of view of understanding what HMRC will expect you to be able to demonstrate if it suspects that you are involved in a chain that can be traced back to a tax loss or losses and suspects that you should have known. 

“If you are concerned about possible MTIC fraud, or you have been contacted by HMRC in this regard you should get in touch with one of our specialist advisors immediately to seek advice and information as to what to do next.”

Please contact Julia via or directly on 01384 327157


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