Wrong test, right answer

The proceedings concerned three appeals relating to missing trader intra community fraud.

Two appeals were from the taxpayer companies and one from HMRC.

HMRC had refused input tax claims on the basis that the directors knew or should have known that the transactions with which they were involved were likely to be connected with fraud.

The issue before the Court of Appeal was whether the correct test had been applied to establish this.

The Court of Appeal said that the question was not whether the trader had exercised due diligence but whether he should have known that the only reasonable explanation for the circumstances in which his transaction took place was that it involved the fraudulent evasion of VAT.

In relation to HMRC’s appeal the judge had not erred in deciding that the tribunal’s findings were insufficient to establish that the second taxpayer should have...