This judgment has no real technical points of interest and yet it provides some real entertainment value and a reminder of the high stakes required for a spot of VAT fraud.
The appellant, one Ms Laura Harries, had run a number of failed businesses in the beauty treatment sector, in and around Llanelli. She had received an £825,000 loan from the Welsh Development Board to support a new business venture – the creation of the UK’s largest beauty treatment centre which would, according to her business plan, create employment opportunities for 30 plus staff.
The bulk of the development grant was quickly spent on the refurbishment of a recently acquired property – the new supersized beauty treatment centre. The construction works were overseen by main contractor “Aware Limited” which promptly forgot to declare any output tax on its VAT returns in respect of the construction works. In the meantime the appellant, now trading as Glam Tanning and Beauty, submitted VAT returns claiming significant amounts of input tax. HMRC checked the claims and subsequently refused the VAT repayments suspecting MTIC/Carousel fraud. Penalties were also issued to the appellant on the basis that her actions had been deliberate and concealed.
Marc Simpson, director of Aware Ltd, could not be reached to provide any meaningful assistance with HMRC’s enquiry. Ms Harries appealed HMRC’s decision to refuse her business’s input tax claims. The initial defence was that a) the expenditure was genuinely for her business; and b) that Mr Simpson and Aware had ‘left her in the lurch’ in the process of perpetrating a VAT fraud that she was not party to.
At the Tribunal Hearing, Ms Harries mounted a confused defence which included a claim of identity theft – her vengeful twin sister had wrested control of the business from her and was responsible for any VAT ‘misdeeds’. She also admitted to having previously falsified purchase invoices as part of a VAT claim. Finally it became clear, despite Ms Harries’ best efforts to distance herself from the activities of Mr Simpson and Aware, that she had in fact been a director in one Mr Simpson’s previous businesses; and had, after Mr Simpson’s disappearance, seemingly allowed his company to change its registered office address to her own home address.
The judge found that Ms Harries should have known that Aware, under the control of Mr Simpson, was potentially about to commit fraud and, citing ‘Kittel’, rejected the appeal. HMRC’s refusal to repay Ms Harries’ input tax claim was justified.
Similarly, HMRC’s penalty of £15,755 would be allowed to stand.
Ms Harries had also, at some stage, changed her name by deed poll to Alex. Whether this was part of the identity theft argument was never tested because Ms Harries confirmed, perhaps mistakenly, at the beginning of the hearing that Alex and Laura were one and the same person. The twin sister did not appear at the hearing although there was a half-hearted request that the the sister be allowed, at a later date, to provided evidence.
It’s worth reminding oneself that, to be deductible, input tax must be directly related to intended taxable business activity but also, that HMRC has the power to hold any ‘actors’ in a transaction chain jointly and severally liable for any tax loss in that chain that occur as result of fraudulent activity. The key principle here is ‘means of knowledge’ – i.e. if the person seeking input tax credit should have known that someone involved in a transaction chain was intending to commit fraud the repayment may be withheld.
