Payless Cash & Carry Ltd v Patel & Ors

Where a company claims that its director caused it to submit fraudulent VAT returns, the claimant must prove that the relevant transactions were not genuine. A badly run business and poor records do not, without more, establish fraud. However, cumulative evidence of altered records, unexplained inconsistencies, unusual trading patterns, unreliable witnesses and missing evidence may prove deliberate fabrication. The claimant need not prove the wider commercial context or identify what actually happened instead. Genuine payments to a supplier do not necessarily validate other transactions attributed to that supplier.

The claimant company was in liquidation and sought almost £4m from its former sole director. It alleged that he caused the company to claim input VAT on purported purchases from ten so-called missing traders, thereby creating a liability to HMRC. The other defendants were joined for freezing-order purposes only. The central issue was whether the transactions reflected in the company’s VAT records and accounting documents were genuine. The director maintained that the purchases, invoices and payments were genuine and that the company had traded normally.

1. Claim established. The court found that the purported missing-trader transactions, subject to limited exceptions, were not genuine as represented. The director was liable to the company for the resulting wrongful VAT claims. The precise amount of liability was left for agreement or further ruling.
2. The claimant bore the burden of proof. Fraud required particular care and an enhanced level of persuasion within the balance-of-probabilities standard, applying [1996] AC 563. The claimant did not have to prove the wider commercial context of the fraud, or establish what alternative trading arrangements had actually occurred.
3. A poorly managed business, inaccurate books and unconventional practices would not alone prove fraud. Here, however, their cumulative effect was compelling. The red cash books contained unexplained alterations, late insertions and conflicting parallel entries. The Sage records contained unexplained deletions and inconsistencies. The trading patterns, extended credit, cash payments, supplier characteristics and missing witnesses were also inconsistent with genuine arm’s-length trading.
4. The court rejected the explanation that the irregularities resulted from accident, incompetence or honest mistakes. The records had been created or altered to project transactions which did not correspond with reality, principally to support input-tax claims.
5. Verified payments to some suppliers did not establish that all transactions with those suppliers were genuine or linked to genuine invoices. The court separately identified limited transactions which were genuine or not proved invalid, and directed that the final compensation should reflect them.