UK: Being Civil To MTIC Fraudsters

Last Updated: 3 April 2009
Article by Neil Swift

This article was first published in the Tax Journal, Issue 973, 23 March 2009

Neil Swift, an associate in the Fraud and Regulatory department of Peters & Peters, looks at attempts by HMRC to combat missing-trader fraud by non-criminal means

MTIC fraud has had such a devastating effect on the VAT free movement of goods between one EU state and another that it is hardly surprising that it has prompted Government to produce one quick fix response after another. The interaction of missing traders, buffers and brokers has led to the loss of thousands per transaction and millions or even billions of pounds per year.

The fundamental challenge for law enforcement has been that whilst financial rewards for the fraudsters have been high, the risk of being punished has been low. A sad fact recognised by the Public Accounts Committee. However, whilst the scale of the fraud appears to have peaked in 2005/6 with £4-6billion of attempted fraud, government efforts to combat MTIC fraud are paying dividends with a reduction in attempted fraud in 2007/8 to between £500million and £2billion.

Although it takes time for criminal prosecutions to progress through investigation to conviction, in its 2008 Departmental Report HMRC reported only 36 convictions throughout the whole of 2007. Given the scale of the fraud there is clearly a substantial criminal law enforcement deficit and notwithstanding the Government's apparent success in stemming the tide, MTIC fraud remains a sufficiently attractive and lucrative criminal enterprise to represent a threat to the Exchequer for some years to come.

Against this background, on 6 February 2009 HMRC published Notice 161, describing its policy of conducting civil investigations into and imposing civil evasion penalties on those knowingly involved in MTIC fraud.

Selective Approach To Criminal Investigation

It has never been the policy of Her Majesty's revenue-collecting departments, howsoever organised, to criminally investigate and prosecute all those suspected of tax offences. With its primary responsibility of collecting revenue, the resource-intensive and time-consuming approach of criminal investigation and prosecution has traditionally been reserved for the most serious cases, where only criminal sanction is appropriate and where successful prosecution can do most to encourage the compliance of others.

While this 'selective' policy has been the subject of challenge, the practice of offering the majority an administrative alternative, with the object of collecting the tax and interest and punishing the errant behaviour with a financial penalty, remains.

With the coming together of the Inland Revenue and HM Customs & Excise the Civil Investigation of Fraud (CIF) procedure became the non-criminal aspect of the policy. CIF continues to allow HMRC to give the taxpayer suspected of serious tax fraud the opportunity to co-operate and comprehensively disclose his or her wrongdoing, following which HMRC collects the tax, interest and appropriate penalty.

The Criminal Investigation Policy provides a non-exhaustive list of circumstances in which HMRC will commence a criminal rather than civil investigation. Rather than repeat the list in full it is sufficient to note those features commonly occurring in MTIC fraud: it is generally the territory of organised gangs conducting a systemic attack, often involves the use of false documents (such as invoices bearing hijacked VAT numbers, or providing a false trail for goods that do not exist), and is almost certainly part of a repeated course of unlawful conduct. More significantly, the Policy specifically states that one of the categories where HMRC would usually initiate criminal investigation is MTIC fraud.

So, one is prompted to ask, where does Notice 161 fit in? In a Written Ministerial Statement on 23 February 2009 Stephen Timms, Financial Secretary to the Treasury, stated that the new procedure is to be used where neither criminal investigation nor the CIF procedure is appropriate. At this point it should be noted that non-criminal enforcement measures have been used to tackle MTIC fraud for many years but before considering what the appropriate use for the new procedure might be, let us first look at the procedure itself.

Notice 161 Procedure

In cases where HMRC suspects that there have been serious indirect tax irregularities due to knowing involvement in MTIC fraud the first step will usually be a meeting between HMRC, the taxpayer and the taxpayer's professional adviser, at which HMRC will confirm:

  • the period(s) or return(s) it is investigating
  • that the investigation is not being conducted with a view to criminal prosecution in relation to those period(s) or return(s)
  • why HMRC suspects that there are serious indirect tax irregularities and
  • why HMRC believes that dishonest conduct has occurred.

The taxpayer is then given an opportunity to provide an explanation, including a wholly exculpatory one, for the suspected irregularities.

A significant point of difference from the CIF procedure is that rather than the taxpayer being encouraged to own up to his delinquency in full in return for an assurance that he will not be prosecuted for it, a taxpayer dealt with under Notice 161 should be warned of the possibility that disclosure of any irregularity outside the investigation's specified scope may be prosecuted criminally.

Although Notice 161 does not specifically invite the taxpayer to commission a formal disclosure report, it is implicit that the taxpayer, should he wish to co-operate with the enquiry, will need to make some form of disclosure, possibly accompanied by a payment on account. As in CIF cases, having considered the disclosure, HMRC reserves the right to make its own enquiries and if necessary may make use of its statutory information powers against both the taxpayer and third parties.

If the taxpayer does not wish to cooperate with the investigation he does not have to. However, if he does not, or if HMRC discovers that he has not done so as he should, there will be a consequential effect on the level of penalty.

The Notice states that if the taxpayer has been dishonest HMRC will normally apply a civil evasion penalty. However, if one assumes that the requirement of showing 'knowing involvement' refers not simply to the taxpayer's own transaction, but to being knowingly involved in a transaction which forms part of an MTIC fraud, it would appear that HMRC must suspect, and persuade the taxpayer that it can prove, actual knowledge of the fraud rather than means of knowledge. If that is correct, it is difficult to see how a taxpayer might persuade HMRC that while at the relevant time he had knowledge of the facts he had no dishonest intent. HMRC are bound to draw an inference of the latter from the former.

The usual principles of penalty mitigation will apply, with the appropriate reductions for an unprompted disclosure, an early and truthful explanation of the extent of the irregularities and how they arose, and full and prompt co-operation during the investigative process.

If dissatisfied with HMRC's written decision on the nature and extent of the irregularities and applicable penalty, further representations can be made but ultimately HMRC will issue a formal assessment. If dissatisfied the taxpayer can request a local reconsideration or appeal to the Tribunal.

MTIC Fraud -- Changing Law Enforcement Strategy

On one view Notice 161 simply reflects the evolution of HMRC's policy of dealing with MTIC fraud using means other than traditional criminal enforcement.

Although at the outset criminal prosecution was its primary weapon HMRC has, over time, used other measures to disrupt the fraud and stem the losses. Pressure has been exerted on UK banks to withdraw facilities from the relevant trade sectors. Alongside the introduction of statutory joint and several liability HMRC sought to promote an interpretation of the VAT legislation that would permit it to deprive innocent traders of the right to reclaim repayment of input VAT in so called tainted chains.

When this approach was rejected by the ECJ (in the Optigen, Fulcrum and Bond House cases) HMRC pursued a policy of extended verification of repayment returns. The ostensible purpose was to determine whether, in accordance with the Kittel test, the taxpayer knew or should have known that it was participating in a transaction connected with fraud. The indirect but no doubt fully intended effect of this was further disruption, with capital tied up for many months during the verification process, restricting the ability of even the blameless to trade. In response, fraudsters developed the practice of contra trading, where the dishonest broker offsets his claims for repayment of input VAT in the tainted chain against the output tax collected when importing and selling on goods in a second 'clean' chain of supply.

HMRC has increased the resources devoted to verifying new applications for VAT registration. The introduction of the reverse charge for mobile phones and CPUs has frustrated most of the business to business delinquency associated with these products. Fraudsters have had to look elsewhere for portable high value goods to move around, ranging from expensive motor cars to sports performance tablets. HMRC remains vigilant for attempts to circumvent the legislation.

Use Of The Procedure

HMRC has increased the resources devoted to verifying new applications for VAT registration. The introduction of the reverse charge for mobile phones and CPUs has frustrated most of the business to business delinquency associated with these products. Fraudsters have had to look elsewhere for portable high value goods to move around, ranging from expensive motor cars to sports performance tablets. HMRC remains vigilant for attempts to circumvent the legislation.

The procedure could be used as a means of dealing with knowing buffers. However, as buffers generally account for their VAT, it would appear that this must be coupled with the imposition of joint and several liability to yield significant tax revenues. Perhaps it is to be regarded as part of a wider plea-bargaining exercise to enlist assistance in prosecuting the major players. However if the buffer does not go on to give evidence for the Crown it remains to be seen what if any evidential use could be made of a confession and civil settlement against others in a prosecution for conspiracy to cheat.

It is perhaps a reflection of the changing nature of MTIC fraud that unlike the statutory counter measures employed, the Notice is not specific to a particular trade sector. This may well be to allow a rapid response to MTIC whatever the commodity, and whether the trader is thought to be totally delinquent or only selectively so. With that in mind perhaps the procedure could be used where a small but significant part of a taxpayer's activity was tainted by fraud.

Finally, given the cross-border nature of this type of crime, consideration must also be given to whether an assurance of non-prosecution by HMRC would provide any or sufficient protection in relation to the possibility of an overseas criminal enquiry, particularly suspected money laundering.


It is safe to assume that criminal investigation and prosecution in this area is still an important part of HMRC's overall enforcement strategy but the circumstances in which appropriate use will be made of a civil remedy against those who acknowledge their dishonest involvement in this most serious type of tax fraud remains to be seen.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.