Tax Fraud in UK Law

A sale of 1,000 mobile telephones may be entirely regular, or entirely regular so far as the taxpayer is (or ought to be) aware. If so, the fact that there is fraud somewhere else in the chain cannot disentitle the taxpayer to a return of input tax. Similarly, three suspicious involvements may pale into insignificance if the trader has been obviously honest in thousands.

The statement of the Chancellor of the Exchequer made in Parliament on 18 October 1990 makes it quite clear that, while in cases of tax fraud the Revenue will be influenced by a full confession in deciding whether to accept a money settlement (including presumably an appropriate penalty), it gives no undertaking to do so or to refrain from instituting criminal proceedings.

To look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial. A tribunal could legitimately think it unlikely that the fact that all 46 of the transactions in issue can be traced to tax losses to HMRC is a result of innocent coincidence.

Further in determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them.

The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who “should have known”. 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.

Mr Anderson's response was to assert that the clean chain and the dirty chain were indeed part of an overall scheme to defraud the revenue. Indeed it seems to me that the whole concept of contra-trading (which is HMRC's own coinage) necessarily assumes that to be so. But that assertion is the assertion of a factual conclusion which HMRC is required to prove on the facts of an individual case. As Mr Bishopp said, much will depend on the facts.

That safeguard is not that the Inland Revenue is satisfied that there is reasonable ground for suspecting that an offence involving fraud in relation to tax has been committed, but that the judge who issues the search warrant is so satisfied after he has been told on oath by the Inland Revenue full details of the facts which it has discovered.