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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.