Missing Traders Schemes and Your Tax

Case Study: Manguzi Hardware Limited vs. KRA

KRA conducted an audit on MHL on the suspicion that MHL was involved in a missing trader scheme. KRA’s findings were communicated to MHL via a letter dated 9/4/2018 stating that MHL’s tax liability amounted to Kshs 148,761,731.34 inclusive of VAT and Corporation Tax.

On 24/5/2018, KRA gave a notice of assessment for the said amount for which Kshs 51,743,210.90 constituted VAT whereas Kshs. 97,018,520.44 was Corporation Tax. MHL objected to the assessment by a letter dated 21/6/2018 to which MHL issued an objection decision on 26/7/2018.

MHL lodged an appeal at the Tax Appeals Tribunal

MHL averred that there were invoices, delivery notes, proof of payment to suppliers through RTGS, records of stock to prove that the goods were actually purchased and delivered and used to produce vatable sales for which income was declared. MHL thus stated that it was not plausible to assert that MHL declared income and paid tax on the basis of phantom stock.

MHL further averred that the main bone of contention is the accusation that MHL was part of a conspiracy racket designed to evade tax; the narrative being that some of MHL’s suppliers were not tax compliant. MHL submitted that it should not and can not legally shoulder the burden of other taxpayers

MHL argued that the only conditions for a claim of input VAT can be summarized as:

  • The input VAT is incurred by a registered person;
  • It is incurred to make taxable supplies;
  • The input VAT is not specifically disallowed
  • The claim is backed by a proper tax invoice;
  • Input VAT was actually paid.

KRA stated that sometime in January, it received information about 6 traders namely Kishna Enterprises, Shanlester Enterprises, Swala Wholesalers, Vidija Enterprises, Seanet Trading Enterprises and Nimeshkumar Ratilal Patel, that were involved in the “missing trader” scheme whereby taxpayers reduced their VAT liability by claiming input tax from the said traders.

KRA averred that under this missing trader scheme, the above-mentioned traders generated fictitious invoices and sold them at a fee to taxpayers, to depict a business transaction whereas there was no actual supply or movement of goods and services. The taxpayer then used the invoices to claim input VAT, leading to a reduction in tax liability.

KRA averred that despite the missing traders being registered for VAT by KRA, they only ‘exist on paper’ and deal in the sale of fictitious invoices, they have no known premises to trade from, their identity is questionable, and that they do not buy the goods they purport to sell or the source of the goods sold is unknown.

KRA’s witness, testified that his efforts to contact the suppliers were not fruitful even after identifying the names of the directors of the entities from the iTax system. He stated that the names of the directors of the suppliers were picked from the iTax system and the persons contacted. However, most of the contacts provided were not getting through, and the few that were answered declined to avail themselves and denied ever operating such businesses.

KRA averred that it reviewed MHL’s objection and found that MHL did not provide any relevant documentation to show that it indeed purchased and paid for the supplies it had claimed input tax on, including the delivery notes, invoices, bank statements, receipts or even the records of the purchase day book as alluded to in its averments to prove its allegations.

KRA averred that MHL was a beneficiary of a tax evasion scheme as it paid very little or no VAT at all or carried huge liabilities as trade creditors from one year to another owing to huge input VAT claims yet the purported creditors were in essence the missing traders. In addition, MHL tried to cover up the fictitious transactions by being issued with tax invoices, ETR receipts, and further making payments into the bank accounts of the missing traders. However, they did not provide evidence to show that the goods it claimed were purchased, were actually delivered and later sold to customers.

In its ruling on, TAT observed that:

  • The burden would have been successfully discharged by providing documents to demonstrate that the input VAT claims were not anchored on phantom stock. Documents that suffice to demonstrate the same include delivery notes, invoices, bank statements, receipts, or ‘records of the purchase day book’.
  • in as much as the taxpayer has the documents to prove purchase, it must be satisfactory, proved that the alleged transaction actually took place.

As such, the TAT dismissed the case

MHL appealed to the High Court

On 10/0/2023, the High Court upheld the TAT decision

The High Court observed that:

A taxable supply can be proved by production of various documentation including orders, purchase ledgers, copies of the stock records, and delivery notes in addition to invoices and payment details. Without such documentation, it is difficult to exonerate a taxpayer from having participated and/or benefited from a missing trader scheme.



Missing Traders Schemes and Your Tax

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