Two very different cases through the VAT tribunal addressed the question of ‘Can VAT be reclaimed?’. What was interesting was that both cases used the same tests to decide whether input VAT could be reclaimed and in one case whether a mis-declaration penalty applied. Basically the tribunal applied a smell test – does it smell right?
In McCord (TC06812) the invoices related to qualifying cars and in Vale Europe Ltd (TC06810) Platinum and other precious metals were the centre of the argument. Both taxpayers found themselves having an argument because they failed to think “this is too good to be true” and then go on to think “this must be dodgy so I should run a mile “. Lessons for all here.
The tests adopted by both tribunals have been finessed through numerous cases and are:
- Was there a tax-loss?
- If so, did this loss result from fraudulent evasion of VAT?
- If there was a fraudulent evasion of VAT, were the appellant’s transactions which were the subject of the appeal, connected with that evasion
- If such connection was established, did the appellant know or should it have known that its transactions were connected with fraudulent evasion of VAT?
Not many businesses realise they are at serious risk if they don’t do due diligence on their suppliers and customers. For example, in McCord the disputed transactions involved two parties who Mr McCord met at a car boot sale. The tribunal concluded that the circumstances of the deal were “too good to be true” and more checks should have been made when an unannounced supplier and customer so coincidentally and conveniently introduced themselves. Because of the likelihood that the supplier and customer were in league with each other, the tribunal dismissed the appeal in respect of cars bought by Mr McCord from one supplier to be sold to the customer in the Republic of Ireland.
So ‘Can VAT be reclaimed?’ It must always be remembered that VAT can only be reclaimed where it relates to a legitimate business supply. If a business ‘should have known’ the transaction was connected to fraud it will pay a heavy price; even where it has unwittingly found itself caught up in a fraudulent supply chain. Not only is ignorance no defence; it’s also likely to be very expensive.
If you’re ever not sure of anything related to VAT then always better to check it out – why not give us a call? Please remember sooner is always better.