One of our clients was recently contacted by the Fraud Investigation Service (FIS). This is a specialist section within HMRC who investigate tax frauds and can lead to criminal convictions.

Background on the case

Our client was involved in selling goods – vapes – in the UK. Vapes are one of the products that HMRC consider to be risky, in that it is an area where businesses are involved in fraudulent transactions with the intention of recovering VAT that they are not entitled to. This has been known as carousel VAT fraud, which while normally involving supplying goods when in the single market, can also apply to domestic transactions.

Being contacted by the FIS will be a daunting prospect for anyone, particularly as the FIS has such wide ranging powers. At Gerald Edelman, however, we have a dedicated and very experienced VAT team who are used to dealing with HMRC on all matters no matter how potentially serious. This is partly due to the fact that most members of the team used to work in HMRC earlier in their careers and so understand how HMRC work. Our team took over the investigation on behalf of the client which meant that they did not have to deal with the investigators directly.

Most VAT fraud involves long supply chains. If a business within that chain disappears or becomes bankrupt owing VAT, HMRC can explore further to determine whether anyone else within the chain was either complicit in the avoidance of VAT or didn’t carry out the correct due diligence on their suppliers or customers. If either is the case, HMRC can treat that business as jointly and severally liable. As mentioned, HMRC do have wide ranging powers and as well as treating other businesses as jointly liable for debts, they can forcibly deregister a business from VAT, effectively not allowing it to trade in the UK.

How our team responded

Our VAT team corresponded with HMRC for a few months, demonstrating to the investigators that our client was unconnected with other businesses within the chain and where appropriate had carried out due diligence on the customers. They demonstrated that the vapes were imported with VAT applied and paid via Postponed VAT Accounting (PVA). The firm had also carried out an audit and during that had checked the goods being stored in a warehouse; often in cases where there is fraud, the goods don’t exist. We demonstrated that our client did actually hold and own the goods. They also proved that the goods were paid for, normally upfront which again doesn’t always happen in VAT frauds. Finally, the team demonstrated that the client was a large business in China, again building a picture of a bona fide business.

Comments from VAT Partner Richard Staunton: “This case truly underscores the importance of having experienced professionals manage complex investigations. Our deep understanding of HMRC’s processes, gained through years of experience on both sides, enabled us to present an airtight case that ultimately protected our client.”

Head of Asia and Partner, Lynn Lin also commented: “Working closely with international clients, particularly those based in China, requires an appreciation of cross-border complexities and business practices. This success reinforces our commitment to supporting clients with robust representation and tailored expertise.”

Engaging honestly and swiftly with HMRC questions is always the best approach. After a few months of contact, the investigator was happy that our client was not involved in any way in the VAT fraud they had identified. It is normally very useful to use an independent team from the business as it takes emotion, worry and stress away from an investigation. It also helps when that team knows how HMRC work and what they are looking for to resolve their investigation. This was a great result as very often these cases can last years.

Our client has since said: “The support we received from Gerald Edelman was invaluable. Their professionalism and strategic guidance took away the stress of the investigation, allowing us to focus on our core operations with confidence.”

Get in touch

If you are looking for guidance or support in a complex case with HMRC, feel free to reach out to a member of our team today.