TC09659 - [2025] UKFTT 01211 (TC)

On 18 March 2021 HMRC Officer Sebastian Harvey (“SH”) telephoned SF. SH was looking into SKM because SKM had had its VAT Registration Number verified by several traders who HMRC was monitoring. HMRC’s initial enquiries showed that SKM had made significant supplies in VAT period 02/21 and they were trading in the scrap metal sector which was high risk.

On that call, SK explained SKM’s business to SH, noteworthy points being that SK stated SKM had been trading for 7 months, its turnover was £5/6 million (the notes of the call are unclear as to whether that was an expected annual turnover, or turnover for the first 7 months of trading – the former seems more likely) and that SK described a trading model that was the “broker model” since there is reference to inspection of the goods being conducted by the customer when goods are delivered by the supplier. SK’s description of the business in SH’s notes is also consistent with SK’s description in his own evidence.

SH and SF discussed MTIC fraud on that call. It was not entirely clear from SH’s notes of that call whether SH explained MTIC fraud to SF and SF confirmed he understood what he was being told, or instead whether SF independently explained what he understood by MTIC fraud. Since SH was not available to give evidence and the notes were capable of more than one interpretation, we preferred the explanation SF gave in his evidence, and found as a fact that SH explained what MTIC fraud was and SF confirmed he understood what he was being told. That is also consistent with SH’s typed MTIC activity report from 18 March which records SH explaining MTIC fraud followed by SH asking SK to explain his understanding.

On 18 March 2021 SH produced an activity report stating as his conclusion “The business records would indicate that SKM are a credible business. I have not identified any fraudulent activity”.

Following that meeting HMRC emailed SF a letter requesting “information on your trading activity for period 01/12/2020 to 28/02/2021” which included a request for details of “An explanation of the due diligence you performed on this supplier.”. HMRC also sent SF a copy of HMRC’s guidance entitled “How to Spot a Missing Trader” after the telephone interview. This guidance states, “If you are a VAT registered business it is important that you read this leaflet.” It sets out an explanation of what MTIC fraud is, the risks to look out for and how businesses can avoid being caught up in MTIC fraud. It gives a list of suggested checks and examples of specific checks. SF’s evidence was that he had read that leaflet (and we accepted that as a fact) but we were not persuaded, based on his oral answers, that he had read it with care and acted upon the advice in it.

Relevant sections of this guidance (referred to below as the “HMRC Leaflet”) read:

“What is missing trader fraud?

Missing trader fraud involves a ‘missing’ or ‘defaulting’ trader who deliberately fails to pay its VAT liability for taxable supplies made in the UK. Those supplies may pass through a number of intermediary traders before they are either sold to an end user in the UK or to a customer outside the UK. These supply chains are known as ‘tax loss chains’. In some cases the organisers of the fraud will use non-tax loss chains alongside tax loss chains in order to disguise the VAT losses as part of an overall scheme to defraud HMRC.

How can missing trader fraud affect your business?

If you knew or should have known that your transaction was connected with fraud then HMRC may refuse your VAT claim in respect of that transaction. In determining whether you knew or should have known HMRC will consider all of the circumstances relating to the transaction, including whether you took reasonable steps to verify the integrity of your supply chain.

How can a business avoid becoming caught up in missing trader fraud?

It is in your interest to check carefully who you are dealing with. It is good commercial practice for businesses to carry out checks to establish the credibility and legitimacy of their customers, suppliers and supplies. These checks may need to be more extensive in business sectors that are commercially risky or vulnerable to fraud and other criminality.

HMRC does not expect you to go beyond what is reasonable. However HMRC would expect you to make a judgement on the integrity of your supply chain and the suppliers, customers and goods or services within it.

What kind of checks can I undertake to help ensure the integrity of my supply chain?

The following are examples of indicators that could alert you to the risk of a connection with missing trader fraud:

1.

Legitimacy of customers or suppliers. For example:

• What is your customer’s/supplier’s history in the trade?

• Have you been contacted within a short space of time by a prospective buyer and seller offering to buy/sell goods of the same specifications and quantity?

• Has your supplier referred you to a customer who is willing to buy goods of the same quantity and specifications being offered by the supplier?

• Does your supplier offer deals that carry no commercial risk for you –e.g. no requirement to pay for the goods or services until payment is received from the customer?

• Are you being offered deals that involve consistent or pre-determined profit margins, irrespective of the date, quantities or specifications of the goods or services being traded? Have normal commercial practices been adopted in negotiating prices?

• Are you being asked to make payments to third parties other than your supplier or payments to an offshore bank account?

• Are the goods adequately insured?

• Are high value deals being offered with no formal contractual arrangements?

• Are high value deals being offered by a newly established supplier with minimal trading history, low credit rating etc?

• Is a small, newly-established business offering to supply you with goods cheaper than a long-established supplier?

• Has HMRC specifically notified you that previous deals involving your supplier were connected to fraudulent VAT losses?

2.

Viability of the goods as described by your supplier. For example:

• Can you be sure the goods exist in the quantity and specification being offered?

• Are they in good condition and not damaged?

• Why are large quantities of goods with non-UK specifications being offered for supply to you in the UK?

• What recourse is there if the goods are not as described?

Examples of specific checks carried out by existing businesses

The following examples may help you decide which checks to carry out. This list is not exhaustive and it is for you to decide what checks you need to carry out before dealing with a supplier or customer:

• obtain copies of Certificates of Incorporation and VAT registration certificates

• verify VAT registration details with HMRC

• obtain signed letters of introduction on headed paper

• obtain some form of written and signed trade references

• obtain credit checks or other background checks from an independent third party

• insist on personal contact with a senior officer of the prospective supplier, making an initial visit to their premises if possible

• obtain the prospective supplier’s bank details to check whether (a) payments would be made to a third party and (b) in the case of an import, the supplier and their bank share the same country of residence

• check details provided against other sources e.g. website, letterheads, BT landline records.

Paperwork in addition to invoices may be received in relation to the supplies you purchase and sell. This documentation should be kept to support your view of a transaction’s legitimacy. The following are examples of additional paperwork that some businesses retain:

• purchase orders

• pro-forma invoices

• delivery notes

• CMRs (Convention Merchandises Routiers) or airway bills

• allocation notification

• inspection reports.

What will HMRC look out for when considering the extent of my checks?

In each case HMRC will seek to identify what actions or precautions you took in response to any indicators of risk. This will focus on the due diligence checks you undertook and the actions taken by you in response to the results of those checks. In each case HMRC will consider:

• the due diligence checks that were performed, including any checks designed to address the specific risks of a particular transaction

• the extent to which your checks were appropriate, adequate and timely in relation to addressing the risks identified

• the results of those checks and what action was taken, if any, in response.

Can HMRC tell me exactly what checks I should undertake?

No. The examples contained in this leaflet are only guidelines for the kind of checks you could make to help you avoid participating in a fraudulent supply chain. The checks you will need to make, and the extent of them, will vary depending on the individual circumstances of your trade and it is for you to consider what questions you need to ask to protect yourself in the particular circumstances of your individual transactions.”

On 7 April 2021 SKM’s agent sent HMRC various business records, including a “sample due diligence pack” for Simvic and 15 BTL invoices.

On 26 April 2021, SH wrote to SKM’s agent stating “the compliance review of SK Metals Ltd has concluded”.