HM Revenue and Customs (HMRC).
From a business viewpoint, where the 'registration threshold' is exceeded, a supplier of goods or services has to register for VAT and, in other cases, a business may apply for voluntary registration. Registered businesses account to HMRC for the difference between output and input VAT. Consider a business (B). Output VAT is that which B collects from sales of its business output. Input VAT is that which B has to pay on its purchases (i.e. input to the business) - see HMRC - How VAT is charged and accounted for. The difference between output and input has to be accounted for. Clearly, if output exceeds input then B has to pay the balance to HMRC. Conversely, a claim may be made to HMRC.
These arrangements often result in businesses
holding large sums of money pending payment to HMRC. In many instances, the temptation to disappear with that money has proved too much to resist and it is hardly a surprise that various 'scams' have arisen to try to avoid payment - HMRC VAT fraud. These are referred to as 'Missing Trader Intra-Community' fraud (MTIC fraud).
There are two types of MTIC fraud - acquisition and carousel - as well as one variant - contra trading. Complexity is frequently added by fraudsters operating via networks of companies often across several international boundaries. A key element in such frauds is that despatches of goods within the European Union (EU) between VAT registered businesses are not subject to VAT. As a very simple example, trader A (in UK) buys from trader B (in France). No VAT at this stage. A then sells the goods to trader C (in UK) and A receives the VAT on that sale from C. Trader A then disappears with the money. This example would be an 'acquisition fraud'.
The amounts of money involved can be massive. In the Mobilx case  EWCA Civ 517, Elias LJ began by stating:
'For many years, Her Majesty's Revenue and Customs (HMRC)
have attempted to combat "missing trader intra-Community" VAT fraud.
It is notorious that the trades in bulk mobile phone and computer chips
are especially susceptible to that type of fraud. Latest published
estimates (Measuring Tax Gaps, December 2009) disclose potential losses in 2005-2006 of up to £5.5 billion and in 2008-2009 of up to £2.5 billion.'
The staggering extent of loss due to fraud is considered in an article BDO Fraudtrack report reveals shocking cost of VAT fraud to UK. See also HMRC's document 'Measuring Tax Gaps' published in 2012.
A recent case in the First Tier Tribunal (Tax Chamber) illustrates some of the complexity: CCA Distribution Ltd v Commissioners for HMRC  UKFTT 253 (TC) - the decision is also available via Bailii. The case was concerned with decisions of the Commissioners to deny
to CCA the right to deduct input tax. The Commissioners argued that
certain deals were connected with fraudulent evasion of VAT and that CCA
knew (or should have known) this. For the periods of time in
question, CCA's trading activity involved buying mobile phones from UK
suppliers and exporting them to other European Union (EU) States.
The First Tier Tribunal - with its various Chambers - came into being as a result of the reorganisation of tribunals following implementation of the Leggatt Report (2001) by the Tribunals, Courts and Enforcement Act 2007. The structure is explained at Lawobserver-Tribunals. In the CCA case, the Tax Chamber comprised just two members: a judge and a lay member. They disagreed as to whether CCA should be allowed to deduct the tax. The tribunal judge exercised his casting vote to decide the case in CCA's favour.
In 2006, the European Court of Justice (now the Court of Justice of the EU) decided Axel Kittel v Belgian State where it was decided that a taxable person is not entitled to deduct input tax where "it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT"
Mobilx is the key English appellate decision on the interpretation of the words 'knew or should have known.' The Court of Appeal considered the Axel Kittel judgment and held that in order for a taxable person to be deprived of the right to deduct
input tax it had to be shown that he knew or should have known that his
transaction WAS connected with fraudulent evasion of VAT. It was not
sufficient to show that the trader knew or should have known that it was more
likely than not that his transaction was so connected. However, a trader
could be regarded as a participant and lose his right to deduct where
he should have known that the only reasonable explanation for the
circumstances in which a transaction took place was that it was
connected with VAT fraud.
Returning then to the CCA case in the First Tier Tribunal. The tribunal stated (para 386) that, as decided by Mobilx, it was enough
to show that CCA knew or should have known that the only reasonable explanation
of their dealings was that they were connected with fraud. Given the complex factual background, the tribunal found this to be a borderline case (para 387) with the judge finding in favour of CCA's entitlement to deduct input tax whereas the second member came to the opposite view. The judge's casting vote was then exercised to decide in favour of CCA.
A fuller explanation of the CCA case has been published by Mr James Pickup QC who represented CCA before the tribunal. Pickup states:
' .....post Mobilx the Tribunals are moving away from a slavish examination of a trader’s due diligence and considering more the overview of the appellant’s trading practices, perhaps going back over a period of years, to determine the circumstances of its trading and whether in the appeal period there was any aspect of the trading which should have indicated that the “only reasonable explanation for the circumstances of the transaction was that it was connected with fraud”.
Mobilx explained - Maitland Chambers
Mobilx explained - Monckton Chambers
Outlaw.com - Missing Trader Fraud
International Tax Review 28th August 2012 - Introduction of new measures to tackle VAT fraud
Accounting Evidence - 17 year sentence for VAT carousel fraud - R v Ravjani  EWCA Crim 2519.