SHORT CASE REPORT FTT DECISION – ‘MTIC’ FRAUD – KITTEL TEST PTGI International Carrier Service Limited v. HMRC [2022] UKFTT 20 (TC)

21 January 2022

SUMMARY

  1. A so-called “MTIC case”, in which HMRC alleged knowledge or means of knowledge of fraud.  The taxpayer, PTGI, denied those states of knowledge.  After a relatively lengthy trial, the Tribunal allowed the appeal of PTGI.
  2. The decision represents a good reminder that HMRC’s “MTIC” decision-making mould is not a “one size fits all”, unbeatable formula at the Tribunal.  The Tribunal will robustly analyse HMRC’s (usually) inference-led allegations.

BACKGROUND AND ISSUES

  1. PTGI was a telecommunications company with a retail and a wholesale arm.  The retail arm focused on selling pre-paid telephone cards to individuals, and the wholesale arm focused on purchasing minutes used for the retail component and arbitrage trading.  At all material times, PTGI was wholly owned by its US parent company, PTGI-ICS Inc, a public company listed on the New York stock exchange.
  2. On 20 February 2017, HMRC denied PTGI-ICS Limited (“PTGI” or the “Appellant”) the right to deduct input tax (£13.75M) claimed in VAT periods 06/15, 09/15 and 12/15.
  3. On 18 August 2017, HMRC denied the same right (£5.42M) for VAT period 03/16.
  4. HMRC claimed that PTGI incurred the input tax in transactions connected with the fraudulent evasion of VAT and that PTGI knew or should have known of this.
  5. HMRC accepted that the burden of proof was on them and that the standard of proof was the balance of probabilities.
  6. PTGI accepted that there was a tax loss at the start of each transaction chain and that the tax losses were attributable to the fraudulent evasion of VAT.
  7. The issues are:
    1. Is there a tax loss?
    2. If so, does the tax loss result from fraudulent evasion?
    3. If there is fraudulent evasion, were the Appellant’s transactions connected with the fraud?
    4. If they were connected, did the Appellant know or should the Appellant have known that its transactions were connected with fraud?
  8. PTGI accepted that there was a tax loss resulting from fraudulent evasion.  It also accepted the accuracy of the transactions’ descriptions, which were found to be connected to each loss via IKB or Indigo.  Therefore, the focus of the appeal was on the fourth question (the “knowledge question”).

FINDINGS

  1. The FTT found that “what must be established, on the balance of probabilities, is that the Appellant should have known or should have known that the only reasonable explanation for the circumstances in which the relevant purchases took place was that they were transactions connected with such fraudulent evasion”.
  2. The FTT said that it was “telling” that despite HMRC’s regular visits and the amount of information received from IKB and Indigo, neither was de-registered for VAT nor had input VAT claims been denied during the relevant period.  The Tribunal, therefore, concluded that, even if the due diligence had been different, it was unlikely that this would have given PTGI the means of knowing that the transactions were connected with fraud.
  3. The FTT further concluded that the relevant surrounding circumstances did not establish that PTGI should have known of the connection to fraud and nor should it have known that the only reasonable explanation for its transactions was a connection with fraud.
  4. The surrounding circumstances established a heightened risk that trading with IKB and with Indigo might have resulted in a connection with fraud and no more.
  5. The FTT allowed this appeal.
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Increased Investment in Personal Tax Compliance in the UK (Published in Thought Leaders 4 Private Client)

Advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. To compound the issue, the Russian invasion of Ukraine and the corresponding economic fallout prompted domestic governments to increase transparency in relation to investments held by wealthy foreign individuals (with a focus on oligarchs).

In the UK, in the context of the cost-of-living crisis, public opinion certainly seems to be in favour of increased accountability for high-net-worth individuals (eg, on 9 October 2022, 63% of Britons surveyed thought that “the rich are not paying enough and their taxes should be increased”).1

HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work; they are well placed to take advantage of new international efforts to increase tax compliance, particularly considering the already extensive network of 130 bilateral tax treaties in the UK (the largest in the world).2 The UK was also a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.

This article discusses the main developments in support of the increased focus on international transparency and personal tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.

It should be noted that a somewhat piecemeal approach, with constant tinkering makes compliance difficult for the taxpayer and is often criticised for lacking the certainty that a stable tax system needs to thrive.

This article was first published with ThoughtLeaders4 Private Client Magazine

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