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VAT Fraud Solicitors explain VAT Fraud, MTIC Fraud and Carousel Fraud

3 February 2022
HMRC Fraud

This is not ‘ run of the mill' criminal law, and clients should actively seek a specialist in this area. That means understanding how the Tax system works, the workings of the alleged fraud, and the law which applies, none of which are everyday aspects of every criminal solicitor's work.

VAT Fraud, the basics.

Taken at its highest VAT fraud is an offence of tax evasion and one which can ensnare individuals, sole traders, accountants, company directors, and so on.

The most common investigating body for VAT fraud is HMRC but the more complex cases can be handled by the Serious Fraud Office (SFO) - this brings its own unique set of challenges for anyone being investigated and their specialist VAT fraud solicitor.

What is an MTIC/Carousel/Missing Trader Fraud?

Missing Trader fraud (MTIC) occurs where someone buys goods from an EU member state VAT free (as goods are generally sold on import) and then sells them, charging VAT and then disappearing with the VAT without paying it to the Revenue. This simplest form of Missing Trader Fraud is also called ‘ acquisition fraud'.

Carousel fraud is the more sophisticated form of missing trader or MTIC fraud. The potential for loss to HMRC is huge so this is the type of case that is most frequently investigated.

  • As with basic MTIC VAT fraud, the initial UK seller of the goods goes missing without paying the VAT it has collected from the first buyer.

  • The goods are then usually passed through a number of traders (who are sometimes part of the plan), who may make small VAT payments to HMRC in accordance with their net VAT liability, thus providing some legitimate cover for the original (fraudulent) trader.

  • The final seller, also claiming back its VAT, will then export the goods back to another EU state (sometimes but not always the country of origin) VAT free.

  • The goods can then be purchased again from the EU seller to re-enter the UK in another fraud in which the first trader goes missing having claimed the VAT.

The fraud is set up in a way that could go on endlessly, hence the term Carousel Fraud. This type of transaction can obviously result in huge gains for the offender. However, innocent traders can be caught up in the criminal case, and sometimes legitimate company directors can be targeted unfairly by HMRC in both criminal and civil proceedings.

The Law on MTIC Fraud Explained

The legal basis for a prosecution in most MTIC frauds is the offence of Cheating the Public Revenue. The offence will be charged as a conspiracy in most cases, as this activity is usually planned and carried out by a number of people. The prosecution could also be brought under the catch-all common law offence of Conspiracy to Defraud.

Cheating the public revenue means any form of fraudulent conduct which results in diverting money from the Revenue and in depriving the Revenue of the money to which it is entitled.

As with all fraud cases, the prosecution have to prove the case against the defendant beyond a reasonable doubt. This means that the jury must be sure that the defendant was acting dishonestly to obtain money due to HMRC. As far as a conspiracy is concerned, they must also be sure that the defendant was acting in the context of a plan with at least one other person to do this - this could be anyone except a spouse.

How do specialist VAT fraud solicitors defend MTIC/Carousel/Missing Trader Fraud prosecutions?

Every criminal investigation and prosecution is different. There is no single approach that will work in every case. But there are certain aspects of strategy that apply to most missing trader and carousel fraud cases.

Terminology in MTIC/Carousel/Missing Trader cases

The absolute basics involve knowing the principles and mechanics of the fraud. This starts with the language an experienced VAT fraud solicitor should be familiar with. Where words such as broker, buffer, exporter, EU supplier, or MS supplier are unfamiliar to the defence solicitor or barrister, a client might well have doubts about the level of experience his/her lawyers have in this area.

The courts also use different definitions of roles in sentencing: Shippers, launderers, architects, front liners, organisers all get treated differently by the judge on sentence. These are concepts experienced VAT fraud solicitors will be familiar with.

Management of the evidence

Information management is particularly important in MTIC defence preparation because the number of transactions is usually very high, and the goods can be measured on an industrial scale. The sheer volume of information that makes up the prosecution case is massive, and this requires a logical and organised approach. How should the information be catalogued and summarised? Should it be cross-referenced between companies, defendants and time periods?

These are the types of questions that a competent criminal or VAT fraud defence solicitor may well ask when planning the preparation of the client's defence. The information may involve thousands of pages of invoices, documentation relating to the import or export of goods, and/or documents relating to the structure and business of companies. All have their place in the case, and all must be examined critically, and of course, in the right context.

A client must be vigilant and be satisfied that his or her defence lawyer's approach is firmly rooted in the outcome of the case, not just in the process.

Unused material

The same approach is applicable to the analysis of the ‘ unused material', i.e. statements and evidence which are not relevant to the prosecution case, but may assist the defence. Documents that may help the defence case have to be identified and used appropriately, not just ‘ processed' by a defence team who don't realise their importance. This requires a meticulous approach from the VAT fraud solicitors, even when the number of documents is in the tens of thousands or higher.

Roles of companies and individuals in MTIC Fraud

In any case which involves a conspiracy, as MTIC cases usually do, the level of knowledge and participation on the part of the defendant are relevant. Some companies could be operating in the passage of goods without realising.

Even where a company is operating dishonestly, not all staff or even all directors might know that they are involved in a fraud. It is important for a good fraud defence solicitor to spend time with the client and any other witnesses who were involved in the business to get a clear idea of each person's responsibilities, and how this story is to be told convincingly at court.

As far as the roles of different companies are concerned, it may also be important to look closely at evidence which the prosecution says links a bogus company and the client's company, taking the client's first-hand account of how links were innocent, and examining how this can be supported by any other evidence available.

Time with the client in MTIC cases.

Understanding the roles different individuals play in a set of allegations is very important, and must be done by spending time with the most useful witness the defence team have access to, the client. The value of time spent with the client cannot be underestimated. It is key to the defence. Problems in the evidence need to be checked and considered with the client before the trial. If this preparation isn't done in time, the cross-examination of the defendant by the prosecution barrister may prove fatal to the defence case.

How important is the choice of barrister in an MTIC case?

The choice of barrister in a carousel fraud case is of course important to get right. Barristers must not just be charismatic and eloquent. Fraud work requires attention to detail, and a grasp of complex factual situations and financial arrangements. The barrister must know the evidence properly and cannot rely on being spoon-fed by VAT fraud solicitors in the preparation of the case.

Wherever possible, the barrister should have previous experience of similar cases and have been successful in defending prosecutions for MTIC fraud in the past. The solicitor chooses the barrister or barristers for the defence, and this means that the barrister must deliver in the run up to the case, or know that the solicitor will have no patience with a lack of input. The solicitor is under no duty to keep a barrister involved in the case if the client's interests are not being served.

In complex cases the barrister may be assisted by a second junior barrister. A junior barrister is simply a term used to describe a barrister who is not a QC (Queens Counsel), and many juniors are highly experienced. To put things in perspective, the great Michael Mansfield defended in his IRA bombing cases and Miners' Strike cases while he was still a junior barrister.

The job of the second junior is largely in respect of assisting the ‘ leading' junior barrister, or QC, with considering papers in the case. This will sometimes be a barrister who is self-employed, like the leading junior, or employed directly as an ‘ in house' advocate.

Sentencing and POCA (Proceeds of Crime)

Sentences in these cases can typically range from 9 months for the less serious money laundering offences associated with the fraud to up to 10 years for the major players in the case. In sentencing, much depends on the role of the different defendants. Sentences can in some cases be suspended, and a good VAT fraud lawyer can sometimes minimise the role his or her client played through negotiation with the prosecution and, mitigation in front of the judge.

One thing that Vat fraud solicitors with the requisite background in financial offences should be aware of from the beginning of the case is that MTIC fraud cases are often followed by Proceeds of Crime Act recovery proceedings. This means that a defendant could face his or her assets being taken away (possibly even if they are not connected with the fraud) if he or she is convicted. This is a particularly draconian law and the strategy that the defence lawyers run in the case should be focused not just on avoiding a conviction and a prison sentence, but also on preserving the client's position in respect of his or her assets so that a lifetime of legitimately earned wealth is not forfeited to the state. For more information, see the sections on the Proceeds of Crime Act (POCA).

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